The Bear’s Lair: Corporatism is not Capitalism

The Federal Trade Commission under its fearless leftist chair Lina Khan is proposing to ban non-compete agreements, which prevent employees from working for a competitor for an often lengthy period after their departure and are applied to some 30 million U.S. employees. The usual Chamber of Commerce types and “conservative” journalists have squawked, arguing that Ms. Khan is a hardline Marxist (possibly true) and that she is eating away the very foundations of free market capitalism. Well, I have news for them: partly because of the Fed’s “funny money” policies over the last decade, the U.S. economy is now thoroughly corporatist, not capitalist, and moves like this proposal that free workers from wage serfdom are highly beneficial.

The Industrial Revolution was built by relatively small companies, the largest of less than 5,000 employees, with most employees playing no role in decision making. The “management” of a typical Industrial Revolution enterprise consisted of a very small group; typically the entrepreneur who had built the enterprise and less than a dozen trusted employees who had specific responsibilities within it. With such small management groups and companies typically having modest shares of their market (albeit possibly having a technological or product advantage that enabled them to make large profits) the market for goods and services was free, operating with maximum efficiency as a truly competitive market should.

Even labor markets were free; the employer who wished to avoid dangerous trades union activity ensured that his workers were paid a fair market wage and not subjected to discriminatory dismissal – with almost all the workforce being largely interchangeable, there was little need to discriminate between them, other than ejecting known unionizing “troublemakers.” Further, if a worker was ejected from one company, there were typically many other similar employers in the region to whom he could apply for employment with every chance of success.

Three factors have modified this picture, rendering the free market paradigm far less applicable. First, the arrival around 1900 of gigantic “trusts” made the scale of individual companies far greater and reduced the number of companies in each industry. That reduced the competitive forces in product markets. Second, the bloat of government from 1930 on increased the meddling by bureaucrats of all types, restricting firms’ freedoms, adding unnecessary costs and slowing technological and cost-reducing progress, making the market lassitudinous, far less invigorating than in the traditional free-market model. Third, the growth of middle management, especially in functions such as “Human Resources” led to the explosion of companies’ activities that were driven by political rather than market considerations.

The result is an economy where market forces play at best a subordinate role. Instead, activity is orchestrated by an unholy alliance between powerful government bureaucracies and corporate management driven, not by shareholder returns, as the classical model would require, but by a combination of their own short-term financial interests and the political preferences of their HR departments.

This effect has been greatly worsened by the zero-interest-rate policies of the Federal Reserve in the 2008-22 period, which by making capital inordinately cheap for the largest companies, combined with their regulatory control enabled those companies to quash any competition from new entrepreneurs. The rise in nominal interest rates since last year has not increased real interest rates (because inflation rates are still above the current interest rate level) but it has at least made the worst corporate game-playing unprofitable, and this will, over time, somewhat improve the market’s competitiveness. Meanwhile, however, largely because of the Biden administration’s inordinate thirst for new regulations, U.S. productivity is declining – down 1.7% in 2022 – and living standards must thus commensurately deteriorate.

Non-compete clauses are one of the worst symptoms of corporatism, with thoroughly pernicious effects on the labor market. First, they prevent employees from seeking new employment from the obvious sources when their employer fires them. Fifty years ago, when there was a general tradition of lifetime employment, this was not an enormous problem. If factory workers were laid off, for example in a recession, it was on the understanding that they would be first to be rehired, and in any case in a recession their obvious alternative employers were also unlikely to be hiring.

However, in today’s world, the behemoth companies manage themselves by budgets and annual assessments, and employees have no expectation of permanent employment (or of a pension). Instead, they are often laid off through a whim of their supervisor or the HR department. In such circumstances, their best alternative is to seek employment with a competitor, but the non-compete agreement prevents them from doing so. They may thereby be condemned to a lengthy period of unemployment until the non-compete agreement has expired. The economic incentive has become thoroughly unbalanced between employer and employee; the employer suffers no significant cost, financial or reputational, from firing an employee, whereas the employee’s life may be disrupted or even devastated. A labor market that is so excessively imbalanced is one that cannot function properly, either as a market or as a source of potentially attractive employment.

In some cases, where the employee is one of the dozen key members of top management, a non-compete agreement might in theory be tolerable – for one thing, such people are much better connected and more able to network to alternative employers. Furthermore, they can afford better lawyers, and have more resources to survive a period of unemployment. But the figure of 30 million employees (even if exaggerated) claimed by the FTC to be covered by non-compete agreements shows that the practice goes far beyond top management. The FTC fact sheet gives the example of a security guard, who resigned from one company for family reasons, yet after being hired by a competitor was fired because the first company claimed a 2-year non-compete clause. Applying 2 year non-compete clauses to security guards is, needless to say, a gross interference with a free employment market, as gross as price fixing with a competitor, and equally economically obnoxious.

Non-compete agreements are just one example of tricks used by corporations to force down wage costs and force up the earnings of top management. The incessant lobbying for increased immigration, both skilled and unskilled, is another area where corporate welfare is increased at the expense of U.S. nationals, normally those of lesser skill but in some cases, such as computer programmers, of very high skill indeed. Not only are the employees whose wages are forced down harmed, but the economy itself becomes hooked on cheap labor, and therefore will fail to mechanize and modernize, falling behind its competitors. This is the case in Britain, whose population on a small and overcrowded island has increased from 50 million to 70 million in the last four decades, almost entirely through excessive mostly low-skill immigration.

Another such example, at the opposite end of the scale, is the practice of excessive stock buybacks, which very often have the effect of forcing long-term shareholders to buy back stock in times of prosperity, when prices are high, only to have to sell much more stock at a much lower price, diluting themselves severely, when an unexpected recession (they are always unexpected) occurs. Top management, on the other hand, through buybacks gets to maximize the profits on its stock options in good times, by goosing the share price to ridiculous levels. Then, when the price crashes and is diluted in a recession, it can often “reprice” its stock options at the new lower level, thus profiting twice from the shareholder losses that management’s greed and stupidity has caused.

I am not generally a fan of the Biden administration, but to the extent that it fills key regulatory posts with intelligent anti-corporatists like Lina Khan or, as in President Biden’s State of the Union address last month, proposes substantial levies on stock buybacks, there can be no question that it is helping regenerate the free market and reduce the power of corporatism. A Republican administration, should one be elected in November 2024, may thus have a significant cost to the economy, partly offsetting its benefits in lower regulatory costs and proper control of illegal immigration. That is a very good reason, during this period of Presidential primaries, to reject fiercely any Republican candidates who are tinged by corporatism, as were Mitt Romney and the Bush family.

President Trump, needless to say, does not have that problem!


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)