Do you believe in economic policies that help consumers? Or what about policies that help business owners? Or policies that help employees? Why not help everyone? The problem is, no matter how good your intentions are, you simply cannot. In many cases, what is good for one group of people is bad for others.
In the 1700s, a Scottish man by the name of Adam Smith identified exactly this conflict. He knew that each of these three groups sought to gain from the losses of others. He also realised that if businesses were forced to compete, then the benefits of this competition would accrue to consumers. He called the force which guided this dynamic the “invisible hand” and gave birth to a new idea called capitalism.
For business owners in a capitalistic society, this meant there were only two ways to generate economic profit: one, use resources more efficiently than the competition; or two, influence the state to effect policy to reduce competition.
Fast-forward 300 years and these remain the basic options that continue to face management teams of businesses all around the world. Compete as fiercely as possible – but only if one needs to compete at all. The greatest economic profits will be captured by owners of businesses that are protected from competition. And generations of MBA graduates who are now running the world’s largest businesses have been taught exactly this.
The FT’s Robin Harding recently penned an article titled: “How Warren Buffett broke American capitalism.” In it, Harding shines a light on the “dark side” of Buffettism which is “to avoid competition and minimise capital investment in the economy.” The very concept of an economic moat relates to the extent to which a business need not compete. A business that can raise prices sustainably is a high-quality business – precisely because competition will not force prices back down.
For business owners, or shareholders, competition is anathema. For consumers, competition is the force that keeps prices cheap. Which brings us to Amazon.
Amazon is having a destructive impact on many competing businesses that lie in its path. Amazon’s enormous scale and sophisticated use of data renders the challenges of many competing businesses near-futile. It is one of the greatest competitive forces the world has ever seen.
This force is clearly bad for owners of competing businesses. And some have even called for the state to regulate Amazon – to stop it from disrupting so much of its competition. Adam Smith predicted this: business owners would seek protection from the state to reduce competition. This is good for business owners (or shareholders), yet bad for consumers.
Amazon’s gigantic tidal wave of competition, while bad for business owners, is great for consumers. Prices are pushed down which means consumers can afford more goods and services. This is precisely the result that capitalism was intended to achieve.
Now here’s the rub: most people fall into two or three of Smith’s categories. All are consumers, while many are employees and also own shares in businesses. So is competition good or bad? If you do not consume much but own a lot of businesses, then you shun competition at all costs. If you only consume but are not employed and do not own shares, then competition is great. But then how do you generate your income to consume?
What is good for one group is bad for others. And when many fall into more than one group at the same time, balancing the trade-offs of competition is no trivial task for the policymakers of today.
Montaka owns shares in Amazon.com (Nasdaq: AMZN)
Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.