“A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.”
These words were the opening statement of a White House executive order by Joe Biden to save economic freedom in theory by limiting it in reality through government intervention. Biden is right that competition is the cornerstone to a prosperous economy, but the best way to promote competition is less regulation instead of more of it. When business decisions are up to bureaucrats instead of actual business owners accountable to their customer base, it’s the consumer who will lose the most.
Inefficiency of Efficiency as a Policy
Two of the most successful businesses in American history are Standard Oil and Walmart. They became that way because they were relentless at being the most efficient in their businesses. As both companies grew, they expanded their operations into new ventures, but these were services and products whose purpose was to support the main business. This is known as vertical integration.
Standard Oil manufactured their own barrels and railroad tanker cars instead of purchasing through a third party because they were able to make a better product for themselves at a lower cost and were able to save overhead on the markup that a supplier would charge.
Walmart created their own distribution network that was exclusive for their store’s use. They used their own trucks and drivers to deliver stock to and from their stores instead of relying on someone else. This efficiency that they created from being their own distributors also had the compounding effect of improving how they managed their inventory, which meant that not only did they have low prices but also always had stock.
These two examples led to both companies overtaking their competition and increasing their market shares for their industries. Standard Oil acquired many of its smaller competitors in the oil refining industry with the results being that many people working at the acquired firms received jobs with Standard Oil, and the price of oil fell during their growth because they passed their efficiencies on to their customers through the lower prices they charged. Today the company is remembered as the original big bad monopoly, but its negative reputation doesn’t match the facts.
Kmart was America’s largest discount chain as Walmart was growing. Walmart not only went on to become number one through their superior business practices, but Kmart today is now practically out of business. That is how things are supposed to work in a free market, but today’s politicians feel like they have the need to regulate this because it’s not fair to the business owners that ended up losing the game, despite making a lot of money as they played it.
Instead, today there would be calls for Walmart to spin off their distribution centers, and we might later find out that those politicians received donations from Kmart. Or there might have been regulators preventing the Standard Oil drums and cars being used because they weren’t from an approved third party. In each of these hypothetical situations, the government would be promoting competition but through fragmentation, and the cost of this would be greater inefficiency, less innovation, and higher prices for consumers.
Small Businesses Can Compete against Behemoths
In Sam Walton’s autobiography Made in America, he acknowledged the criticism that his company, Walmart, was outcompeting smaller businesses which was leading to their closure. Instead of defending himself, he laid out a strategy for smaller businesses to compete with him and enter a specialized market. He knew that he might stock a little bit of everything from every category, but he couldn’t offer it all. So it would be up to the shop down the road to fulfill that need for the customer.
Likewise, Amazon is considered a villain by many for its business practices and the ability of its online store to often outcompete its brick-and-mortar counterparts. But less than forty years ago, the company did not exist. There were much larger chain stores, like Sears, that sold everything under the sun. If they didn’t have what you wanted in the store, they had it in the catalogue. The big businesses of yesterday seemed impossible to compete against when they were at their peak, but the landscape always changes with rises and falls. Today Sears is out of business while Amazon dominates retail. Amazon did this because they sold books online, became the best at it, and then expanded their product lines.
Government Regulations Hurt Competition
Government rules and regulations bear heavy costs on businesses in many ways. For example, many states require companies to purchase workers’ compensation insurance even if the business is one employee (the owner) and he pays himself almost nothing. Instead of benefiting the new business, government helps subsidize the larger businesses. Likewise, some areas charge businesses license fees for the privilege of working out of their homes. As the lists and requirements go on, so do the costs and the time to make sure you are in compliance. And if something is out of order, more capital resources are wasted through fines, and time dealing with these issues is time spent away from running the business.
When John D. Rockefeller would visit his competitors that he wanted to acquire, he would bring Standard Oil’s accounting books with him. This was a time before government income taxes and modern accounting procedures, so everything in his books was transparent and easy to understand. And what most of his rivals understood after viewing the books was that Standard Oil was a much more efficient operation than the one they were running. Most business owners tend to relax after the money starts to roll in, but not Rockefeller.
Innovation and a relentless work ethic were John D. Rockefeller’s competitive advantages over his rivals. He made those traits part of his company’s core values, and he was able to outcompete others in his industry. As his company grew, he created new products, new jobs, and drove prices down for consumers while increasing quality.
Imagine how different the world would be today had regulators stepped in and told Rockefeller and the companies he was acquiring that they couldn’t join because everything is better when a lot of small companies compete over a small pie instead of a few large companies making the pie bigger. It wouldn’t be fair to the consumers if the government put their finger on the scale to make sure that the less competent get a bigger advantage over the more competent.
Of course, the fairest way to make sure there is honest competition is through fewer rules and less interference, not more. But the people in Washington setting the policies right now don’t want to hear that.