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Debunking ‘monopoly capital’

Refocusing on the essence of creating wealth and value for all.
Picture: Shutterstock

SWELLENDAM – One cannot legitimately apply the word “monopoly” to generic concepts such as “capital”. I’ve been guilty myself, and it’s nothing more than sloppy thinking or emotive spin if it is aimed at the multi-dimensional accumulation and deployment of money. That has many forms: governments, central banks, financial services and banks, institutional investors, holding companies, multi-nationals and very large companies. If “monopoly” means being a protected sole supplier, that certainly cannot apply to the above, apart perhaps from the first two. Ownership is even more widely dispersed than control.

The real issue is the increasing concentration of capital control in fewer hands, to the extent of exacerbating inequality, exclusion and social discord under the pretext of an academic hallucinogen that capital is scarce. (See article here). This has been covered many times. Enough to be confident with the generalisation that in rent seeking and chasing capital gains, many players have diverted efforts away from funding the production of goods and services, or value creation. This has virtually closed the taps of “trickle down” and advancing inclusive economic growth. It has spawned another fanciful folly – that monetary machinations and policies can generate prosperity.

Small wonder then that most believe that if you control capital, you control everything, including the destiny of a country. That reflects a basic misunderstanding of wealth creation itself: that it is about printing money; or the outcome of a lucky strike at a hedge fund casino; cooked in a financial advisor’s brew; or that it is solely embodied in profit. And then we miss the majesty of economics: that wealth is created by usefulness to others and concretised in legitimate commercial transaction.   

We do not need scare tactics and deflections of “radical economic transformation” to reboot our economy. As I wrote in my previous article, a giant leap can be achieved by radical government transformation. But capital concentration certainly also has to be addressed to promote inclusive growth. That’s being interrogated on a global scale, including global finance, fickle capital mobility and tax evasion. It would be wise to tap those experiences before rushing to controls and prescriptions with a giant meat cleaver in the hands of a predator slashing at some personified spook.

In retelling the untold story of the ancient and still benevolent design of the wealth creation process, I have extrapolated a Contribution Account© or Inclusivity Statement© for the mining industry, based on the PWC 2016 survey. I have had to make some Contribution Accounting assumptions regarding personal income tax and depreciation, and roughly rounded the figures to make indexing to R100 easier. None detract from the essential conclusions. 

MINING 2016 (INDEXED)

Revenue

R300

Outside supplies

R200

Wealth created

R100

SHARED

Employees

R53

State

R22

Reinvested

R21

Owners’ dividend

R  4

 

Mining is volatile but the picture has not changed all that much since the decline in commodity prices. In addition, in my own experience over many years with many companies, as well as the national statistics, the principles can be applied at a national average. The conclusion is quite simple: in most cases owners as a group receive the least cash benefit from an enterprise.

In the above example, 2/3rds of the revenue goes to outside suppliers – creating multiple opportunities for others. Then, for every R4 investors receive in cash, workers (including management) get R53, and the state receives R22. There’s always some ambivalence around “reinvestment” which technically belongs to the owners, but it has a contributory nature in ensuring sustainability.

What is the thinking behind the proposed Mining Charter in trying to mess with that model? What possesses organised labour to be oblivious to the delicate balance of wealth distribution and its impact on wealth creation? What tempts policymakers, sometimes with the blessing of organised commerce, to hamstring it with invasive transformation surgery and prescriptions? And wherefrom the populist business bashing rhetoric?

By their very nature, private enterprises are the most inclusive of all collectives. They can be made even more so if the participants decide by themselves and for themselves how wealth creation should be distributed. They have more power to do so than they may believe, and where not, should be demanding it.

That’s not to say that within the model itself there are no legitimate concerns about its make-up and behaviour – including pay disparities, people development and empowerment, and demographic representation. But if those concerns threaten the viability, flexibility and sustainability of the model, it will destroy wealth creation itself. Then prosperity and jobs evaporate. It also goes some way in explaining why capital finds more attractive suitors than investment in productive capacity.

But that’s not the whole truth. Business too has failed to subscribe fully to the wisdom of ages that contribution creates reward. It defines and motivates itself by maximum reward, adding insult to injury by narrowing that focus to one stakeholder, the shareholder. In that it has invited a considerable degree of constraining prescriptions; business bashing and declining sympathy of common folk who, at one time or another have experienced the blinkered business view as customer neglect or exploitation. The damage has been substantial – in reputation, unrealistic expectations and flexibility.

But that can be turned around quickly and effortlessly by adopting the principles of a common purpose in service to customers and a common fate in sharing the fortunes that befall it. On the contribution side, the disastrous monster of the 80s – the agency model, which encouraged executives to “think like owners” and rewarded them excessively for doing so – can be converted into “think like customers”. That supports income or turnover in most non-primary producers. If you add a further discipline of prudence in outside purchases, you have created the most powerful dynamic of increasing wealth, and therefore rewards for all. You can see this dynamic work in the first three lines of the above table: increase revenue by 10%; decrease outside costs by 10%, and wealth creation jumps by 50%!

But the real problem lies in wealth distribution. Obsession with reward turns the model on its head, and invites all kinds of external and powerful prescriptions from government, organised labour and capital.  It then becomes inflexible and often parasitic.  There are two simple conditions for optimal wealth distribution – meet the legitimate expectations of all of the stakeholders and ensure continued contribution. (See graphic example here). These can be managed and indeed, in my experience, are quite malleable if the decisions are left to the stakeholders themselves. Emphasis on wealth creation before distribution, and making the latter as flexible and sustainable as possible, is the most promising inclusive solution to job creation and retention.

At the very least, it will detract from the misguided notion that owning or controlling capital creates wealth.

COMMENTS   19

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The problem is that private enterprise (as inclusive that they may or may not be of all collectives) are not democratic by their very nature and the autocratic within them look at every turn to monopolize, collude or eliminate all forms of competition so that they can grow more wealthy.

In short the private enterprise can be incredibly socially EXCLUSIVE and this is whey we need more social capitalism (not communism).

If you give them more power and less regulation on their behavior it is not a panacea for social inclusion.

What is social capitalism? If I start up a company it is not my responsibility to provide housing, education and other services for my employees and others in the area. Would you include in the definition of “social capitalism” determining the price I can charge for my products and services too?

Social capitalism is a new name ‘invented’ by dying socialists trying desperately to shore up the astronomical failures of socialism.

It is just another form of corruption and will die along with all extreme forms o free lunches.

Socialists always say that the reason socialism failed in the past was because it wasn’t done right. No, socialism failed because it is fundamentally flawed. It will never work, no matter the implementation details.

“Private enterprise is not democratic”.. No, no it isn’t.. nor should it be. Although company CEO’s, management and directors are answerable to and elected by shareholders.

You are a very suspicious person to suppose that all private businesses “monopolize, collude or eliminate competition”. In my experience, only dishonest people think that way.

Also, it’s almost a crime to put socialism and capitalism in the same sentence.

As I understand it, ‘monopoly’ and ‘capitalism’ are a contradiction in terms. The success of capitalism depends on competition for the best mix of quality and price. That is value for money. The purchaser has the freedom to choose. In a monopoly industry such as many of SA’s SOEs, there is nothing to control the price to quality mix. One is expected to pay for electricity, services or an air ticket whatever the price or quality.

There is a tendency towards developing monopolies in the capitalist system as the businesses who get the price to quality mix right outcompete those that do not. The non-competitive disappear or are taken over. Therefore one has to try and reduce monopolies in a capitalist system as much as possible. This may be where regulation comes in. Highly successful monopolies are required to break up and the divisions compete with each other again. In a fully socialist system everything is a monopoly. Monopoly and socialism go together, not monopoly and capitalism.

It is in the interest of capitalists to pay their workers well enough for society to be stable. If too much relative to the competition, one is out of business. For this reason one needs to be efficient so that the maximum value is provided to those the business is serving as well as one’s employees.

Unfortunately this is idealism. The problem is not with the capitalist system, the problem is with the ‘brokenness’ of us humans. Mea culpa.

What is the origin of capital? Somebody had to work hard and live frugally to build his savings. Then he had to take the enormous risk of loss of his precious capital and allocate it to a business model that seems to be profitable. If he is wrong in his assumptions about his investment, he loses everything. All his hard work and frugality would have been in vain. If he is correct in his allocation of his capital he becomes wealthy.

Now it has become popular and acceptable for some envious people who do not take any risks, do not work hard and who live beyond their means, to demand the savings of another. In the name of equality, social justice, inclusivity and redistribution, they attempt to plunder the savings of a hard worker. No matter what fancy names you call it, and how much you play the victim, it is an attempt to plunder the property of another.

“From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time”
― Friedrich A. Hayek, The Constitution Of Liberty

Why should those who have not invested and not borne the risks lay claim to the return on the investment? Those who have contracted labour are entitled to the agreed compensation as contracted. Those who invest and takes the risks are the entrepreneur who create the wealth, that is ultimately shared in the country.

Now consider those who steal from the state through subterfuge and distribute the gains to themselves in another country like Dubai… where’s the wealth creation for the country from that?

Socialist capitalism is the
way forward. Every retrenchment is a customer lost. It’s all about circulating the money and selling to everyone.

It’s effective political word play: take a complex economic model which has political supporters and detractors with varying and often inverse degrees of knowledge and passion, tag on a label representing something which has no mainstream supporters and then give it a tangible,recognisable face.

If Capital = bad, then Monopoly Capital must be badder and Afrikaans/American/Colonial/English/European/Imperialist/Jewish/Western/White Monopoly Capital must be the baddest.

As always, well thought through and well written. Thanks Jerry. In the comments so far I see some rethoric without any credible attack on Jerry’s fundamental points. I like to refer to “the golden triangle” in business – the customer, staff, and the shareholder. Keep them in balance and business flourishes. Over-emphasize one and you’re in trouble.

The Competition Commission exists to prevent the establishment of monopolies in our economy. I have yet to read their view on “monopoly capital” and, if it exists, what are they doing about it?

From my observation, what I find sad in a country like RSA is that the poor dont seem to understand that the wealthy themselves were once upon a time poor. Quite often a third or fourth generation of a wealthy family was poor 4 or 5 generations back. But someone decided to stop the seemingly perpetual cycle of poverty by engaging in wealth creation, which at times is enjoyed the most by the current generation (3 or 4 generations later). To me, if the poor dont understand that they need to stop and do similar for themselves, they will always be drawn to fantasy rhetoric blurted out by sometimes wealthy politicians.

As I observe, on a Friday like this, you’ll find many of the countries have-nots at beer-halls, night clubs, restaurants engaging in instant gratification whilst forgetting that they are giving away a piece of their wealth that they so crave for, to the suppliers, employees, and owners of these places and others.

Don’t chase the wrong basic principle.
Monetary capital by itself, is by its very nature and the effect of continuous devaluation of its value (purchasing power), unable to create wealth or inclusive growth.
So-called “monopolistic” ownership thereof such as the state (monopolistic practises such as tax collection, infrastructure ownership, mineral ownership, electricity supply, railway services, etc) cannot change the capabilities of capital.
Its only through means of wise, skilful and risk-taking employment of capital that value results can be unlocked and that inclusive growth, asset creation and wealth creation can be obtained -something the state has consistently proofed it is incapable of doing.
Proper employment of capital to create value requires a lot more than mere monetary contributions.
Real and selective assets can grow in value, but not money as such. JZ has bankrupt the state and state parastatals in less than eight years. No amount of money (capital) can survive foolish, reckless and corruptive application thereof.

would love to know what the EFF and the BLF would say about this tripe! let me guess – “typical white settler trying to ensure that their ill gotten gains from apartheid years are not nationalised! know what – I wld agree with them 100%!

Yeah and the leaders of BLF and EFF are such upstanding citizens. Tax evasion, incitement to violence and land grabs, harassing/attacking journalists, spreading fake news, overt racism, intimidation etc… Such noble individuals, they so obviously have the country’s best interests at heart..

Jerry, your example ignores the contribution creditors make to wealth creation. Why should one capital supplier (equity) get credit for wealth creation and not the other (debt).

The way I see it is a dividend not paid is simply a capital gain which is why shares hiccup when they go “ex dividend”. Thus reinvested money by the company and dividends are really the same thing i.e. wealth accrued to the shareholder. What about the bond holders? It’s just their terms of payment are different to shareholders.

I may be wrong but I think you are ignoring bondholders for a reason. Capital is an essential part of the wealth creation process simply because capital goods reduce the marginal productivity of labour. I can go on at length but I won’t. Even a freelance horticulturalist (piece job) requires basic gardening implements such as a spade (capital goods). Now here comes the important bit. Let us picture scrooge McDuck sitting on a pile of gold coins. This is just not how it is.

Firstly to avoid confusion let us define capital as the money available for investment (for example in a business). Capital goods are simply capital employed in an industrial setting as opposed to a financial setting.

A modern capital “accumulator” will seek the best return on his capital commensurate with the risk undertaken. Capital flows downhill, if you like. You can question his motives but that does not change his actions. His placement of capital reverberates with consequences. He may buy a share thus releasing capital elsewhere in the system. He may buy a bond which also releases capital in a similar manner and at the same time lowers interest rates. He may opt for a liquid position thus allowing the bank to lend more to others, increasing available capital and lowering interest rates.

Fact: The scarcity of capital is measured by the interest rate which is a market phenomenon measured by the bond rate. The rate of interest varies inversely with the propensity to save. In South Africa this interest rate is high circa 8.5% whereas in the USA it is 2%.

In South Africa is the marginal productivity of capital is very high. The marginal productivity of capital determines the upper limit of interest rates. Put simply the point where it makes more sense to invest in bonds than capital goods. Investors would rather be coupon clippers than employees. This is the problem.

In South Africa capital is scarce as interest rates are high despite (and certainly not because) available capital flows to the bond market not capital goods. Without this flow, interest rates would be higher still. It’s a market kind of thing.

A treatise on capital is incomplete without discussing the origin of interest. The fundamental issue is the destabilisation of interest rates by our monetary system which allows ‘vampire’ financial capital to siphon off industrial capital.

The only monopoly capital in this country at present is Zuma, Guptas and cronies. This monopoly capital wants everyone else to be poor. Zuma has spent mote time looting and building a patronage system than running the country and helping the poor.

End of comments.

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