Here is how markets work:
I make a Thing.
You see the Thing and think, “Hey, that Thing is pretty cool. I think I’d like a Thing,” and you ask to buy one.
I say, great! Here is the price for a Thing.
You will have one of three reactions to the price of a Thing:
“No way, that’s way too much money. I don’t want a Thing that bad!”
“Great! Here’s the money. Thanks for the Thing.”
“I can’t believe Things are this cheap. I’ll take 3 Things.”
If most people have the first reaction, I have to lower my price for Things until most people have the second reaction. If making Things costs me more than people are willing to pay for them, I go out of business (If we simplify the world by saying there is no venture capital to finance a few years of losses).
If most people have the third reaction, I can’t make Things fast enough to keep up with everyone wanting 3 things. I raise my prices until most people have the second reaction.
By raising my prices so that people have the second reaction instead of the third, I make a fortune.
Somebody else will think, “Hey, I could also make a Thing, but I could sell it for 5% less than him, and still make 95% of a fortune, and that’s not half bad.”
Somebody else makes their own Things, and makes 95% of a fortune.
I have to lower my price for Things or else everyone will just buy from Mr. 95%.
New people keep making Things until the price is low enough that other people don’t think it’s worth it to start making their own Things.
Because so many people are now making Things, there is enough supply to meet the demand when most people have the third reaction.
That’s it.
Now we have a competitive market for Things. When this process gets repeated with enough different types of products we have capitalism.
But imagine for a minute that nobody else ever thinks about jumping in and making Things? I can keep making a fortune for as long as nobody decides to compete against me. I could even use some of my fortune to give to people running for elected offices to persuade (read: bribe) them to make laws about what other people must first do before they can start making Things. I can also use my fortune to pressure anyone else who wants to make Things, or anyone in the supply chain who wants to get their Things from somebody else, or sell their raw materials to somebody else who wants to make Things.
Now I’ve broken the market for Things. I’ve made it hard to enter the market with my persuasion (bribes), and I’ve made it expensive to build and expensive to sell with my pressure on suppliers and distributors. Sure, some stubborn SOB will still insist on making Things, and they might be reasonably successful, and maybe even sell 10% or 20% of all the Things sold. But, I will still control the future of Things. My pressure on suppliers and distributors will ensure that the other Thing maker can never make as much profit as I do.
Now the competitive Things is no more.
I’ve managed to murder capitalism.
I didn’t do anything evil. All I did was ensure the profitability of my Thing making business. I’ve benefitted investors, provided a quality product, and helped out everyone in the world who now can use a Thing.
But, even though I didn’t have any bad intentions, I’ve created bad results by destroying the Thing Market.
I have no incentive to make my Thing any better, or the create a new version of a Thing, or to innovate in any way at all. Nobody else can *really* make Things. Now, people are paying more for Things than they otherwise would be, and because of the fortune I have, I can use it as leverage against workers. Go ahead, go on strike. I can afford to lose a paycheck for a lot longer than you can because I make in half a day what you make in a year. So, workers will be forced into taking lower pay because they can’t really go make Things anywhere else.
This is where governments are meant to step in.
Yes, my Libertarian friends, economic theory lays out a role for governments—requires it, even. A government’s job is to ensure that markets remain competitive. Free markets are not the same thing as competitive markets. I’ve laid out in some detail in previous letters the impacts of governments deciding not to enforce competition. It isn’t pretty for anyone but the elite.
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In a different era, when Americans actually had good faith policy discussions, the primary economic difference between conservatives and progressives was just how much the government should do to ensure competition. But those days are so far gone we can’t even see them in the rear view mirror.
If the government does nothing to ensure competition, we end up exactly where the Thing market ended up. Each market will be dominated by one company—or if we’re lucky, a handful of companies. This is not capitalism, but monopolism—or if we’re lucky, oligopolism.
If the government goes way too far in enforcing competition they sometimes end up setting all the prices, allocating all the capital, and making decisions for the business. This is not capitalism, but socialism.
Side Note: No matter what political operators have told you, public safety net programs are not socialism. Socialism is the government controlling the means of production, like in the example above. It is fully consistent with economic theory for competitive capitalist markets to exist in a generous welfare state. Whether or not a country should have public safety net programs, and how generous they should be if a country does want them, is a different discussion entirely from whether to have capitalist markets. It is possible to choose both.
When the government gets too far to the left in market regulation, they can end up picking winners and losers. This is just as bad for capitalism as a monopoly. Why innovate if all I need to do is please my government overlords?
So, it’s been fascinating to see Ron DeSantis, who styles himself a true conservative’s conservative, behaving like a socialist governor in Florida.
I’m not a lawyer, but I’m told by lawyers that DeSantis’ targeting of Disney is likely to get overturned in court. But, for the sake of a policy discussion, let’s pretend it will actually cause real harm for Disney.
DeSantis is attempting to harm Disney—to pick a loser—because the $100,000 it gave to DeSantis before it spoke out against a particular bill was apparently not enough to please the People’s Chairman in Florida.
In the before times, when the world still made sense, it was a very left leaning thing to do to target a company. Conservatives wanted the government to do less in it’s regulation of companies. Companies, they once said, should not be punished for “refusing to create a government-approved message.”
Things have changed, and apparently now conservative economic policy looks… different.
But, this isn’t a one off for DeSantis. When Twitter thought it might not want to be taken over by Elon Musk, DeSantis was again ready to wield any possible government power to coerce Twitter to take his preferred course of action.
This was DeSantis’ view:
If the [Twitter] board is acting in ways that are breaching their fiduciary duty, if they’re doing it for reasons of power and politics, and basically to serve as a suppression arm of the government, well then you’re in a situation where, you know, you need some accountability there. First of all, that’s not free market capitalism, when you have that, OK?
That’s a ruling junta that’s using their policies to try to marginalize people that disagree with them.
Twitter has since changed their mind, and decided to sell to Musk, but this isn’t the question at hand. If we pull on the thread DeSantis is holding here, we come to the logical conclusion that a company should be forced to sell when the government thinks a sale might be best for shareholders.
Twitter can make a pretty good argument that kicking some people off their platform, or restricting tweets about certain topics, is a good business decision—it keeps the product less toxic and doesn’t scare away the middle 70%1 of voters. There is also a decent argument to be made that Musk might ruin Twitter, which would be, and this is the technical term, bad for shareholders.
The First Amendment specifically says that “Congress shall make no law … abridging the freedom of speech.” Twitter is not, no matter how DeSantis might spin it, Congress. Twitter is under no obligation to provide “free speech”. They are, as DeSantis pointed out, under an obligation to run the company in the best way they see. See paragraph above. If Twitter thinks it is bad business to be known as the place where coups are organized to overthrow democracy, the conservative position has traditionally been that they have every right to try to prevent Twitter from being used this way.
This was once known as the conservative hands-off approach to the economy. DeSantis prefers to be much more hands-on, which is what used to qualify someone as communist.
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I can’t wrap this letter up without talking about Elon Musk for just a minute or two. All of this Twitter stuff serves as a really good example of what happens when the government doesn’t do enough to regulate markets. Musk has made himself into the world’s wealthiest man, but it isn’t really because of his cars. Tesla’s market share for cars has never been above 3% for a single year— in fact, I’m fairly certain it has never even been above 3% for a single month. So, how come musk is the richest man on earth, and not the head of Toyota, VolksWagen, GM, or Ford? You could make the argument that EVs are the emerging market, so Tesla’s dominance warrants the pay. The problem is that isn’t really true. Tesla’s EV market share is only 14%, and the legacy auto makers are gaining fast.
Even worse, car enthusiasts aren’t really in on Tesla. They think of them more as tech gadgets that roll, rather than good cars. The people who really love cars aren’t fans. Sure, they accelerate fast, but that’s about the extent of the excitement. I consider myself a gearhead and I was seriously underwhelmed driving a Tesla. Car enthusiasts much prefer the experience of a Rivian, Lucid, Audi, or Ford in the EV market.
So, how did Musk get rich enough to buy Twitter on a whim?
By manipulating markets.
You should really read these two stories about Musk, Twitter, and the Securities and Exchange Commission. Musk repeatedly used Twitter to signal to the world that he intended to do something that would impact Tesla’s stock price, then he made a ton of money when people jumped. Over and over again the SEC gave Musk a reprimand that can’t even be classified as a slap on the wrist, and over and over again Musk told them to…
So, why is stock for Ford—who sells roughly four times more vehicles than Tesla—trading at $14.16 (at the time I wrote this), while Tesla is trading at $870.76, and Toyota—who sells the most cars—is only at trading at $171? Because Elon wanted his C Sed by the SEC.
Tesla doesn’t make great cars, and doesn’t sell nearly as many of them as their competitors. Even when we limit sales to the EV market they are far from dominant. Market manipulation is the explanation that fits best. Occam’s Razor and all that.
In times past antitrust enforcers, like the SEC, would have given a market manipulator an actual punishment to discourage this behavior from anyone else. But, much like DeSantis taking the socialist-parallel track, times have changed. And because Musk was able to manipulate the market to buy Twitter, he can now give the ultimate middle finger to the SEC because he will (maybe) own Twitter.
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Just in case it isn’t clear, 70% of people is, in fact, most people. Twitter doesn’t want to scare away most people.