The Challenges For Capitalism
Article 3: Competing against ourselves - destructive pressures
Copyright © 2003 Dorian Scott Cole
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Article 3, Competing Against Ourselves
The absolute free trade promoters, in their zeal, don't mention that capitalism doesn't always work in every category of trade. An example is in agriculture. Does supply and demand apply in the US agricultural marketplace? If farmers overproduce, the price falls below their costs, and many are ruined.
Due to unpredictable weather and the lack of crop demographic data, farmers can't tell how much produce to raise - they either fail to meet the need, or overproduce. So the government has to get involved. In the US the capability of overproduction is always present, so to keep prices from falling below reasonable levels, the government reduces supply by literally paying farmers not to grow crops. The government keeps the price of some commodities up, such as milk, with price supports. US subsidies to agriculture, although controversial from a free trade perspective, run about $20 billion per year. Europe and Japan also subsidize agriculture. Got milk? That's because it's subsidized.
This is just the tip of the iceberg in worldwide trade. Many nations also use price subsidies to make their other goods competitive in other countries, such as Japanese steel in the US. Were it not for government subsidies to help keep the cost of manufacturing steel low, Japanese steel would likely not be competitive in the US.
Free trade is a banner to get others to open their borders to other's products. It is a major adjustment that leaves a lot of destructive upheaval in its wake. Just as US agriculture struggles to survive under open competition, other nations with predominantly agrarian economies quickly become swamped when they open their doors to free trade. Their agrarian style production can't compete in the face of a free trade market. They can't sell their products, and they can't afford to purchase the incoming products. They are simply out, unable to survive economically, just like the US underemployed who can't afford the US medical system. Many nations are now experiencing this problem.
Capitalism works, but not without controls. In this article we'll see that the danger signs are all around us - competition is eating our breakfast, lunch, and dinner, and companies are so threatened by the extreme level of competition that they go to extremes to avoid competition. When competition spins completely out of control, we will all lose big.
Competing against ourselves - the destructive pressure
There are at least three forms of competition in the world. In one form, which most of us recognize, two or more compete against each other. In the end, there are winners and losers, and 2nd. and 3rd. place in which one or more simply make less money. The second form, common among athletes, is competing against your self. It is expecting more of yourself each time you practice, until you finally meet in competition and demonstrate your abilities. The athlete wins whether he wins the competition or not.
The third type of competition dominates much of today's business world, and it is very destructive. It is competing against ourselves in ways in which we all become losers. Deflation is a symptom - a trend of lower prices, unemployment, and buying less, which may spiral out of control and bring us all down. Capitalism is supposed to make us all winners.
This third type of competition is an insidious monster that fails to control its own appetites. It occurs when we devour ourselves in our incessant quest for more. It weighs on the conscience of the world, asking if fulfilling our greed for more comes at the expense of the poor and needy. The answer may not be so simplistic, as we'll see in Article 7. But a society without ethical values, goals, and control may be doomed to cannibalize itself.
Is a value really a value?
Value (not ethical value) is the idea that something meets needs - it has worth to the person.
The destructive pressure of competition is clearly seen in the difference in the cost of living between larger cities and smaller cities. For example, a spacious, $150,000.00, 3 bedroom home in the suburbs of a small city, is likely to cost over $300,000.00 in a larger city. Companies that transfer people to New York, Chicago, and L.A. commonly give a wage adjustment to help with the significantly higher cost of living.
Is the higher cost of living because real estate and products are less available or because demand outpaces supply? Sometimes, but mostly, no. Higher prices are simply because the market will bear the higher price. To help counter high prices, wages in larger cities are slightly higher, but not nearly high enough to offset twice the price for real estate.
Because of competition and "market will bear" pricing, the buying power of people in larger cities is substantially diminished, and the ability for companies to manufacture competitively is reduced because of the resulting high wages. Jobs leave the area. For people on minimum wage or fixed incomes, who have difficulty living anywhere, it is even harder to remain living in these areas - families are sometimes driven apart.
The poor live in squalor at high prices, and substantial numbers of people have difficulty finding jobs - especially jobs with wages that will support them. Price controls go into effect to prevent rent gouging. Crime increases. As other areas grow into megalopolises, such as Atlanta and Washington DC, they experience similar problems. This is just one example of how competition easily spins out of control. This is something that we have to learn how to control so that competition doesn't destroy us.
Capitalism has many inadvertent effects. While on one hand we may want products that offer functionality, quality, and durability, when we look at the price tag we often select an item that has less functionality, less quality, and has a shorter life-span. While the difference in retail prices of the two items may be wide, the disparity in manufacturing costs may be very little, or in some cases the manufacturing cost of a higher priced item may be even less.
I observed one company create a solid state controlled line of products that offered more functionality, but actually cost less to manufacture. They sold the products at significantly higher prices. Value was sold at what the market would bear. The sales price had nothing to do with the cost of manufacturing or availability.
We may think that manufacturers might sell a lot more of their wares if they would just drop the price. Sometimes this works, but often people associate value with the price tag. A higher priced item may be perceived as obviously worth more - that is, of more value, while a lower priced item may be perceived as "cheap," meaning worth less. In reality, as noted, the manufacturing price may have little to do with the retail price.
This lack of relationship between manufacturing cost and sales price is seen every day in the automotive market. When you purchase a new car, the "add-ons," that is the options like air-conditioning, radio, etc., have prices that have nothing to do with their cost. These items typically have very high prices - much higher than their cost - and are where sales and manufacturing make considerable money. Because of their high price, this is also where after-market suppliers find a market.
"Options" are another place where capitalistic marketing goes Berserk. I typically drive Buicks, for safety, good engineering, low failure rates, handling, longevity, and overall quality (not luxury), especially if you regularly drive on long trips (for Europeans, this means well over two hundred miles in one direction). The total cost of ownership is often less than for uncomfortable throw-away cars in which everything starts failing after three years. This is beginning to sound like a Buick commercial. I've also had some good luck with some other GM cars, Ford Motor Company cars, Mitsubishi, Daimler-Chrysler, etc., but I prefer Buicks - I just wish they wouldn't associate them with golf.
Car companies have interesting ways of marketing options. The most berserk marketing idea that I have ever seen is the idea of including standard lights, like the trunk light, in an upgrade lighting package, so that people who don't purchase the lighting package don't have a trunk light, so can't see to get their packages out at night. Since most people need lights, and expect standard convenience on a car that you purchase for its quality, having lights as an option is one step short of asking if you need headlights or wheels. The idea of a lighting package seems insane, unless it is for accessories like fog lights. I'm sure the marketing department justified it as excellent leverage that appeals to customer needs. Thankfully lighting packages no longer seem to be offered.
Upgrades, like lighting packages, are not based on supply and demand, but on what the market will bear. Much of capitalism is not based on supply and demand. In an "everyone is fair game" mentality, capitalism tolerates door-to-door salesmen who use high-pressure tactics to get inside and sell something for outrageous prices. It tolerates telemarketing sales which uses high pressure tactics to get to people through their telephone and sell something expensive and unnecessary by people who have an answer for every objection until they leave people with seemingly no justifiable way to say no. It tolerates junk mail that floods mailboxes in an effort to sell you something. It tolerates mass e-mail by pirates who steal e-mail addresses to sell something, so your e-mail box is so full you can't find your legitimate mail, and you can't make your address public for fear of these pirates finding it.
If there is any way to get in your face in your home or environment, the culture of capitalism encourages it. Only recently have their been attempts to get telemarketers and junk e-mailers under some control. The lesson is, if they can get away with it, someone will do it - the idea that business will police itself is a nonsense idea. We need a social contract that says that a person's address is not a sales environment, unless invited.
Recent moves seem to be taking us in that direction. Many communities have historically blocked door-to-door salesmen. The "No Call" list has won court challenges from telemarketers. And the last frontier, the Internet, now has legislation and software restricting spam, and software to eliminate popups.
What we have had in the US is a transition from the idea of "value" that is based on meeting needs, which most people could afford, to "market will bear pricing," a baseless strategy that leaves many people in the lurch. It is a slight deviation, but sinister in its effect. Instead of supply and demand controlling the market, price actually controls the market. This is just one of many ways in which companies willingly, or are forced to, manipulate the market to stay in business.
Economic tyranny. There are no guarantees of wealth and economic well-being bestowed by any economic, religious, or governmental system. The best that can be done is to provide a climate that permits opportunity. There is no guarantee that if you take financial risks, that you won't get wiped out financially, except the limitations provided by bankruptcy, which protects the ability to live and make an income while equitably addressing creditors. There really is little protection against economic change - the world changes as the needs of people change, and as progress changes our way of doing things. Today there is little need to have a village blacksmith who hammers metal bars into horseshoes, but there is a need for people who put tires on cars. But what we have found it difficult to guard against is economic tyranny.
When a "sell everything, and sell it cheap" mart moves into an area, the effect is to put an estimated twenty local businesses out of business. Food markets, automotive repair shops, hardware stores, household goods, and a host of other small local businesses are simply unable to compete with the competitive power and scope of the mart. The public is then limited to the variety of goods carried by the mart. Since marts focus on high volume goods, variety and specialization are sacrificed. And with the entrance of the mart, the idea of "customer service" disappears because marts don't believe in it. Need an item on a high shelf? Need advice on fabric quality? Spend half an hour looking for someone to help, who probably doesn't know the answer anyway.
It would be nice if the marts provided good employment opportunities in return. But people can't support themselves on the wages paid by mart jobs. This change caused by marts puts people out of business, offers the community minimum wage jobs, and removes customer service from those who need it. While I support the general idea that the efficiency and buying power of the marts is justified for most items (I'm not against marts), I don't believe that it justifies putting the service and variety oriented stores out of business and people out of jobs that will support them.
The problem is even greater for foreign countries. Many of the farmers and others who supply goods in those countries earn as little as $2.00 per day. They aren't part of the free market style economic system, and can't be since they simply can't get jobs that pay enough to afford the prices in these systems. When countries sign on to Western style economic programs and begin trade, the imported goods put the farmers and others out of business, and the high costs make it impossible for people to purchase the goods that they could afford before.
The larger businesses, like marts and banks, and foreign trade that is persuaded or coerced onto poor countries, has the effect of creating economic tyranny on people. Capitalism's businesses and trade address their own needs, but overlook the needs of the people.
To summarize, I can do little better than to quote Henry Kissinger, from his book Does America Need a Foreign Policy?. Regarding the massive changes insisted upon by free markets, and the destructive ramifications:
"...the advocates of the new gospel often seem oblivious to the historical record, which shows that the practices of reform took many decades to evolve in their own countries.*1
"...The urban working and lower middle class becomes a fertile recruiting ground for radical politics or religious fundamentalism. This phenomenon... contributed to the emergence of Marxism in the nineteenth century and to the Iranian revolution in the twentieth. Even when material conditions of the poor and lower middle classes improve in absolute terms, the migrants become increasingly conscious of the gap between rich and poor, which the the early stages of modernization magnify and which television and other media bring graphically into the homes and consciousness of nearly everyone."*2
"...just as the unrestrained laissez-faire capitalism of the nineteenth century spawned Marxism, so too literal a version of globalization of the twenty-first century could generate a worldwide assault on the very concept of free markets."
"The challenge of humanizing the process is, therefore, unprecedented."*3
I wish I had found Kissinger's book Does America Need a Foreign Policy? in August 2003 when I was formulating this series, instead of near the end of the composition. At least I found that it validates much of my thesis. I highly recommend the book for a thorough look at the political and economic ramifications of globalization.
The destructive practices of capitalism often backfire. Popular political and fundamentalist revolts and deflation overturn capitalist systems or drag the system down. Illegal and aggressive practices often create distrust that limits business activity. Aggressive marketing practices, especially telemarketing, are the number 1 cause of consumer business distrust, leading 76% of consumers to distrust business.*4
While telemarketing companies successfully nab enough suckers to make fantastic profits, they typically destroy business credibility for the rest of us - not that they care. The best question to ask these people is, "Are you giving this away for free?" Many will back away, but many will likely reply that they can make it affordable. So you reply that you can't even afford a dollar a year." At this point, the more aggressive ones will want to take a line item look at your budget, marking off items that they think are less important or refinancable, they also will convince you or your wife to get a higher paying job, and convince you that the product will save you that much money, so you can buy the product now. "No" is not in their vocabulary.
Trends are also sometimes destructive to enterprises. For example, changes within society may be the undoing of the marts. The change seems to come mostly from the push for more and more activity for youth. What I am hearing from people is that the pace of life has picked up so much that they are discontinuing going to time consuming malls where they used to shop for hours, in favor of individual shopping centers where they can find everything in one place and can get in and out quickly.
While these developments may sound good for marts, the rest of the equation isn't. There is more demand for quality, and people are wanting improved customer service - not the intrusive sales person, but the alert and informed staff who can help when people have questions about products. The marts emphasize minimal quality and no service, and will find it very difficult to compete as these demands for service become stronger.
A policy of dehumanizing and mistreatment
Sadly, the most admired retail chain on Wall Street, is the very one wreaking havoc with employment, and includes a culture of dehumanizing people and mistreating them, to achieve its goal as the low price leader the world over. It does this in the face of marketing claims of "made in America puts people in jobs," and recruiting claims of employee ownership, which amounts to very little. Having had close relatives who worked for long periods for their stores in various areas, I know that the negative reports of employee mistreatment in the press are not "isolated" as the store claims, but common conditions endemic to their system and culture - although not "policy." This raises alarming questions about where we are going in a society in which business and competition are very important.
Businesses use many devices as either policy or culture to cut expenses, such as the very common, avoiding paying employees their just due. One way the chain mentioned above does this is by short-staffing their stores, so others are always having to do extra work. Another way they do it is by hiring employees part time, to avoid paying benefits, and then working them an hour short of full time. Yet another trick is to have them work interrupted daily schedules so that peak workload hours are covered without adding labor costs. By interrupted schedules they not only save hiring additional employees, they even save paying overtime.
In this chain, certain things have to get done in the store every day to keep the business running smoothly. Does the store use stockers, as others do? No, the chain makes all duties the responsibility of the understaffed sales clerks. The chain has no customer service people, but all sales clerks are there for service... to the store. The lengths that they go to, to get already overworked people to do these tasks, is perverse and alarming.
The company makes the employees work late to get the work done... without overtime pay - they have to take the time off another day. It locks the doors on stores that are not 24 hour stores, so that anyone employee who tries to leave immediately comes to the attention of a manager. Those who try to leave are those who have rides waiting, or who are under school regulations to work limited hours, or even those with second jobs. No one leaves until all of the work is done. The wait is sometimes hours long, continuing to 1:00 am.
This company tells its employees that they can have breaks, but when they call for a manager for someone to relieve them for a break or lunch, no manager can be found... for hours... consistently every day. Typically there is no one to relieve them because they are continuously short-staffed. Since employees usually feel responsible for their work, they commonly miss lunch and breaks to cover necessary duties.
The company gets maximum coverage for busy times, but consistently avoids paying overtime by requiring employees to take additional time off. They are told to work and then leave early, or to "take a long lunch." What are they going to do during the over-long lunch or break? They sit in their cars in the parking lot, or in the break room.
The company's own audit shows that mistreatment happens on a widespread basis, but they deny responsibility and try to claim that the employees fail to use the time-clock properly. The chain is under investigation in several states, and some suits have already been won against them. They also claim that their profitability is due to their superior buying power and superior computerization. In reality, one of their biggest competitive advantages is that they mistreat their workers to save money.
Public deception is common. Their "We buy American" campaign went out with their international expansion - obviously they had very little dedication - it was just a marketing slogan. Their pattern is to do simply whatever is competitively expedient. I'm not a union proponent, since labor unions typically place workers in a labor VS management environment that is counterproductive, but this is one retailer that is desperately begging for unionization to protect its employees.
This company is not the first to avoid paying its people to cut costs. When one of the oldest retail companies reorganized, it put all of its sales people on commission. People got paid only if they sold products. Many people in the US work on commission and do well, although commission sales is a rocky road for most people who don't have other resources for support. But the stores had departments that literally didn't sell anything due to demographic reasons, poor advertising, and uncompetitive prices. Who suffered? Not the store - they risked floor space. The sales person suffered, until he finally caught on and left for a better job. Commission sales in retail, and many other areas, is basically free labor for the store, skirting even minimum wage rates.
Interrupted daily schedules, forced time off to avoid overtime, and commission sales without an hourly wage base should be illegal.
Do consumers really care that the clerk in a retail store doesn't make enough money to support herself, as long as we get the products as cheaply as possible? By demanding the most for the least, we are pushing salary erosion that is coming for us all. The trend in all business continues to be, to get more from workers while paying them less. A higher priced manager who is efficient can be replaced with two or three people fresh out of college... who are more easily convinced to work longer hours and within months or years can do an adequate job.
Even high priced financial services companies are being affected. One financial company advertises that their people work harder for their customers because they arrive earlier and work later. This slave labor is a good thing? To make matters worse, the government has bowed to industry requests and is moving more "responsible" employees from non-exempt hourly status which gets overtime, to exempt status which qualifies for salary and no overtime. What we are currently experiencing in the US is salary erosion due to extreme pressure on prices. To cut costs, companies are continuously driving out employees with salaries and benefits that support them and their families, and then hiring others who are low pay, and are less than full time (39 hours) so are ineligible for benefits.
These practices echo those of the industrial tycoons of the 18th. and 19th. Centuries, who paid unfair wages, placed people in hazardous work situations, worked people excessively, and in general in their pursuit of wealth acted more like psychopaths in their treatment of their employees, while trying to appear benevolent to the world.
In what we can hope are the final hours in 2004 of this lengthy economic "downturn," consumers have little confidence in the economy to create jobs. Companies are afraid to hire, so are doing everything they can to increase productivity, including pushing their current workers to work lengthy and continuous overtime hours.
The non-compete arena
Is a capitalist economic system really competitive? We hear that it is basically a supply and demand mechanism. In a naive and oversimplified view, we think that supply and demand are established conditions. Many loudly demand that every industry be subject to supply and demand, and deregulate them. Supply and demand does often hold true for many consumer goods. Yet many areas that are claimed to be subject to supply and demand, simply are not.
Prescription drug pricing has nothing at all to do with supply and demand. Prices are kept artificially high by virtue of the prescription system. As soon as a drug goes off prescription, which commonly happens when the drug goes off patent - interesting how that works - the price falls to about a tenth of the prescription price.
Raw petroleum prices (crude oil) are not established by competition. The Organization of Oil Exporting Countries (OPEC) meets to set the prices and quantities that govern what each of them will sell. In the US, this would be called "price fixing" and would be illegal.
The price of petroleum directly or indirectly affects the price of nearly every product that is manufactured, and the transportation of all goods and people. One economic theory purports that the power of a nation is directly proportional to its ability to use energy. The world is now controlled by OPEC. Anyway, the price of petroleum has nothing to do with supply or demand.
Refining companies set the price that we pay for such things as heating oil (diesel), gasoline, and natural gas based on the price per barrel that they pay for gasoline... however they are free to set the price per gallon anywhere they want. In 2002, gasoline prices in some areas of Georgia were down to 94¢ a gallon. Supposedly because of "fear" related geo-political instability, prices nearly doubled. In Missouri, gasoline prices were always lower (usually by 20¢) than those in Illinois because of the higher Illinois State tax on gasoline. But Missouri gasoline prices through 2003 and early 2004 have stayed about the same as Illinois prices, indicating that profiteering is going on in Missouri under the cover of price instability.
Petroleum prices in early 2004 are expected to remain high into 2005. Consumers can't see beyond the veil. Any reason is good enough to justify the price if the market bears the price. Gasoline stations ceased competing on price years ago. They hardly even compete by brand. Mostly they see a lucrative location and put in a station at a price set by what the gasoline refiner (manufacturer and owner) thinks that the location will bear. Two blocks away you may find the same brand for 5¢ a gallon cheaper. The entire system remains non-competitive, and consumers pay the price.
Companies continuously get smarter about ways to manipulate the markets and gain an unfair competitive advantage. One of the oldest market manipulating moves has been for large companies to simply lower their price and sell at a loss to make their competitors either go out of business or sell the business to them.
The "respected" retail chain that I mentioned earlier gets a very large break on the price they pay for items due to the volume that they purchase, and because they require those who do business with them to give them a lower price on the item each subsequent year. But this isn't good enough for their competitive ways. They buy market-leading toys at Christmas and then sell them below their cost (lose money) to attract consumers to their stores. Other toy companies are finding it nearly impossible to compete, and many are closing stores. KB Toys, for example, recently lost over 3500 jobs and over 300 stores. Competition by selling below cost should be made illegal.
In another common move, many companies have moved their "headquarters" offshore, so that they can avoid paying US corporate taxes. Another market manipulation move is representative of the way in which many businesses can avoid supply/demand market forces and gain an advantage over the consumer. One popular online auction site buys up refurbished and overstocked goods and sells them through online auctions. One would think that the public gets the best deal. In reality, the auction company regulates the quantities that it makes available for auction, watches the price that it gets, and when the price falls below a preset margin, it withholds the stock from auction until a more favorable period. So the company simply controls the supply.
Another common method is for companies to "improve" their product with new technology. This typically lowers the manufacturing cost for them, while making it more valuable to the consumer. But even though the manufacturing cost goes down, the actual selling price goes up.
Using products to sell "consumables" is another way companies artificially regulate demand. For example, you can purchase a good color printer for very little money. If you have the printer, then you must buy replacement ink cartridges - the consumable - from that same company. Just four ink cartridges equal the price of the printer. So manufacturers create demand by luring people to purchase printers at very low prices. To the consumer, this looks like stiff competition for printers. It is actually competition for the consumables (ink cartridge) market. This is a widespread practice. For example, hospital supply companies give away biological testing equipment so that companies must purchase their chemical reagents, etc.
One common tactic of market manipulation is simply to reduce the portion of the product while leaving the price the same. Customers often don't even notice. In all phases of manufacturing it is usually possible to package less, or to use substandard parts so that the product doesn't last as long.
Every time I am around any business, I see the consequences of the competitive pressures that they face. One business, with good prospects, approached some investors to try to get their business going again. As soon as I met the investors, I backed away. They had all of the earmarks of investors who want to seize control and drive the business. Later, I warned the company President, who was becoming suspicious. Sure enough, within two months they met with the President to try and leverage their small investment into a majority stake, and demanded to take full direction of the company. This was accompanied by threats intended to force the President to capitulate to their demands. Fortunately they were outmaneuvered in their takeover attempt.
As competition intensifies, companies find themselves backed into corners in which their choices are to capitulate to the stronger competitor, or to resort to mongrel tactics to save their company and employees, and please investors. Their advertising becomes misrepresentative and negative. They manipulate the market. Their sales tactics become high pressure. Unethical and illegal tactics go into use in accounting and sales.
With intense competitive pressures on all businesses, how low can businesses stoop to get a sale? It is like the pressure on inner city ghettos. In the inner city, unemployment is very high and people do many illegal things to make a buck so that they can stay alive. This is the atmosphere into which businesses are being shoved to survive, except worse because they have the added pressure of high investor expectations. It is no surprise that businesses do just what people in the ghetto do - moral, ethical, and legal considerations go out the window just to survive.
In the best of times, the leaders of Worldcom, Tyco, Enron, Arthur Andersen accounting, and even Martha Stewart were indicted for financial wrongdoing, as well as the leaders of dozens of other companies. What will happen as worldwide competition intensifies, especially with unlevel playing fields giving competitive advantage to countries with lower taxes and inexpensive labor?
From my own experience, in my own marketing strategies, I avoid head to head competition. That kind of competition will simply bring on a price war that will either destroy both companies, or make the profits too low to support product improvement and business growth. So I position the product in the market to address customer needs, either through an improved way of doing things (less costly, faster, more convenient, more compatible with the environment), or in a niche that isn't being addressed.
Once you get the market it is difficult for competitors to displace you unless they make steep price cuts, and typically few competitors are willing to start there - some are - but typically trying to sway customers to buy a different product costs way too much (a tenfold increase). So while there is a lot of competition now for many products, like consumer goods that tend to compete on price, I wouldn't say that competition characterizes other new products.
The smarter path is to stay tuned in to customer needs, develop a relationship that they can count on, continuously improve the product, and charge a reasonable price that works for both you and the customer. The hard fact of business is that most companies that try to take on a new market, may have something that kind of works, but they have no idea of what will really improve the way things work in the customer's environment, and they can't have adequate customer service. Those exporting jobs to other countries are finding that out now.
The flip side of the company distrust created by telemarketers and similar bad consumer experiences is the conditions that develop trust. Relationships are built on trust. An Accenture study found that positive customer service experience, length of relationship with company, company or product reputation, brand familiarity, and privacy policies are the things that establish trust. *5Markets tend to end up with two or three major competitors, and these are often determined by who was in the market first, who addresses the compatibility needs of the environment, and who buys whom.
Retail sales is the ultimate sleight-of-hand arena. Retail advertising often is not designed to inform you, but trick you. A product is advertised at competitive prices. When you arrive in the store, you find that you have to pay extra for the power cord, or some other part of the product or service. They know that once in the store with the product in your hand, you are not going to run to the other store to check on their gimmick price.
Another tactic is to advertise items at competitive prices, and the consumer doesn't know that the products are unique. The stores even offer to sell their products at the lowest price of any of their competitors. But if you bring in the SKU number from a competitor, you will find that they don't match the item offered. Larger retail stores commonly require unique SKU numbers which supposedly reflect product differences, so that they don't have to compete on price - while they advertise that they do.
Another trick that competitive retailers use to stop competitive price buying is to put the "package" of items offered together differently than their competitor. You then have to study the price of the individual items at each store to determine which is the best deal. This is a lot of work that most people can't or won't do.
Rebates are another gimmick. Manufacturers know that 30% of people who purchase a product with a rebate attached won't send in the rebate coupon. So they manage to sell the product at a higher than competitive price to 30% of those who purchase it. (Personally, if it has a rebate attached, I automatically purchase the competitor's product at the lower price, unless I really, really want that specific one.) Unfortunately many companies who offer rebates are having financial troubles, and they either go out of business, delay for months, or neglect to send the money. Rebates are a bad sign.
Even in mortgage financing, the fees have been called a "shell game." Every loan company advertises a different combination of rate and fee schedules, or do other sleight-of-hand games. This requires a lot of complex financial calculations by the person applying for a loan to determine which company gives the best deal... if they even will give the deal that they advertise. You may find that you don't even qualify for the advertised rate.
For many retailers and other businesses, advertising specials is just a way to get you in the door so that a sales person can try to talk you into some other more expensive product. There is always a reason why the product "won't work for you," or they are out of the product and offer a rain check. They know that when someone makes a decision to purchase a special, when they get to the store they are going to take something home with them. They operate just within the law so that they can't be charged with "bait and switch." Unfortunately some people in business make their paychecks by selling you something that you don't need.
Everything in retail seems to have some kind of money making scam attached, even gift certificates. We purchased a gift card at a local mall. We were astonished to find that you could not apply the card toward the purchase of an item unless it was the exact amount or lower. Three dollars remained - try to find an item in a shopping mall for $3.00 - it isn't worth the hunt. This guaranteed that some unspendable amount would be left on the card, which the issuer would eventually acquire by default. It wasn't a large amount, $6.00 over two cards, but the mall is nationwide, so if they issued 250,000 gift cards, they retained one and a half million dollars through that little gimmick bordering on theft.
The banking industry is the epitome of public disservice in the name of engorging its appetite for profits. Banking is one of the more profitable industries in the US. When you deposit a corporate check, they often, without notice or any compelling reason that outsiders can deduce, lock up the funds for a few days to a few weeks. You might think that you could take the check to the bank that it was drawn on and get it cashed. Fat chance. If you don't have an account at that banking chain, they refuse to cash their own check. So many banks seize your, or your business's, hard earned cash until they feel like making it available.
Meanwhile the bank collects $30.00 for each check that bounces because of their action. This has happened to me personally a couple of times. In one situation that happened to me, the account of a business that wrote me a check became locked up because of a deposit in their account, causing their check to bounce, and then some of mine to bounce. There was nothing wrong with any of the checks or the businesses who wrote them. Who caused the returned checks because of their unreliability? The bank. Who profited? The bank. Who lost? Us.
People who are poor and live on marginal incomes can usually depend on banks to rob them of their ability to buy food, and if they try to live outside of the banking system, the banks simply refuse to cash their paychecks. It's kind of like a protection racket.
Note: Those who live on marginal incomes, or who have erratic incomes, and can only leave a small amount of money in their checking account, typically find that a lot of things that are out of their direct control happen to a checking account, causing checks to bounce resulting in a $30.00 charge to their account, leaving their account at a deficit so that even more checks bounce. At one time in my life, I found it more helpful to have a savings account, not a checking account, and only use money orders to pay bills. However, this isn't perfect either since businesses sometimes fail to record (or employees steal) money order payments, since without a cancelled check it is very difficult to prove that you made the payment. Cashier's checks are somewhat better. The poor can hardly live without a checking account, but are then victimized by the banking system which creates rules and situations in its own favor.
While I was writing this, another incident occurred at the bank on my checking accounts. I made my deposits just as I have done for years. Suddenly on both my business account and personal account I had checks bouncing. I was startled, but not surprised. I have learned from long experience that you can't possibly outguess this bank. For convenience of depositing funds in many states, I have banked at several large banks around the US in Los Angeles, St. Louis, and Atlanta - they all had strict and erratic policies - not surprisingly, out of natural affinity for each other, these same banks all merged into one national bank.
Typically if you are honored with a returned check, you can call their "national" customer service, and they have no idea why the teller did what he did. You can ask the tellers in advance what they are going to do, and they very politely tell you "probably." It is just like gambling - probability odds are always in favor of the house. This time, accompanying the return check notifications was another letter announcing that the bank had changed their policy on holding deposits. They were now holding them as long as legally possible, and they were sorry for any inconvenience this might cause. A couple of days later they announced that they were purchasing a large banking chain in the Northeast. I suspected they were using my money to do it. Legal, but erratic, and definitely not customer friendly. However, the investment section of this banking chain is currently under Federal investigation. (They seem to have amended their funds availability policy - hopefully it will be consistent.)
As already noted, the banking system is not geared to the needs of people who can't afford to keep a lot of money in the bank. The person may be the guy who is raising a family and working part time at a shoe store, or the Ph.D. who can't find a job that will pay for housing, or the once financially secure middle-aged guy who was just laid off when the company merged and downsized, or a woman recently divorced and supporting a child with the inefficiency of two households, or an elderly person on fixed income, or the young person just starting a new job... we all have our difficult times... even recurrently. It is very difficult to operate financially without a checking account. But if you live on a shoestring budget, the bank will eat the string, leaving you with no string to purchase food and other necessities.
I could go on and on about the myriad non-compete ways that companies find to deal with competition, such as lockout specs that preempt competitive bidding, and car dealers who are notorious for having more underhanded techniques than all others, or banks that are allowed to make rules that let them dip into your account at their convenience. But my purpose isn't to disparage companies, but to expose the myth of competition and productivity improving the economy. Competition doesn't necessarily bring about improvements in productivity - it often just forces companies to find sly, and even illegal, ways to survive competition. Companies must compete or find a way to survive. Closed steel mills and lost jobs are monuments to industries that failed to innovate, and didn't find ways to avoid competition.
The coming perils
When you look "under the hood" at capitalism's free market competition, what you often see is not "supply and demand," but ever more sly ways of market manipulation to deal with the unrelenting competitive reality. When you do see supply and demand, it generally works well, but when it spins out of control you see the carnage of a giant, mindless, uncaring, economic machine. For example in agriculture, without price supports most farms would lose their business due to overproduction and plummeting prices.
The danger is not just companies going out of business, but "deflation," which threatens to send the economy, and our jobs, in a negative direction. We will all be able to afford less because we will have less money. I think that this sinister deflation process has been going on behind the scenes for years - we just haven't noticed it for what it is because the increase in productivity improves the overall economy. Every time someone loses a good job so that a company can make a product cheaper, and has to go to work for wages that are insufficient for support, and thus can buy less, we experience deflation.
As reported in the May 13, 2003 Newsweek article, The Bogeyman of Deflation, by Robert J. Samuelson, "deflation" has risen as a result of too much supply and too little demand. Prices for goods in the US have fallen. The price of cars declined by 2.8%, and the price of computers, which is always falling, fell 57%.
There are two very important lessons in this. First is that deflation is real and can hurt us. Second is an aside about information and technology, the subject of Article 6: The price for computers and other technology items always falls because information always becomes available, and the technology becomes less expensive to make. Fortunately for computer makers, the next generation of more expensive technology has always taken the place of mature technology, and the market has kept expanding.
Now however, there are two trends beginning to have major impact in the computer field. One, most households which are going to purchase a computer have done so. The basic market in the US is no longer expanding at a rapid rate, but follows the trend of population growth and new applications. Population growth in some countries has already stopped, making expanding markets a historical footnote, not a place for increased product sales.
The second trend is that computer chips have reached their technological miniaturization apex, and chips won't continue getting faster indefinitely. Computers will get faster for a while as faster ways are found to do things, such as adding second and third processors - if products actually need it - but technology and speed will not continue driving computer sales.
What does this mean? Well, computer prices fell 57%, and the demand for Internet connections has fallen sharply. Computer makers are merging, or going out of business. Web site growth has become very slow, the price of Web site hosting has reached rock bottom, and Web design companies are merging to create leaner companies, or going out of business. This is a technology that reached a growth peak and some kind of maturity in less than ten years, and then began the downward trend. In comparison, electronic consumer goods (TV, radio) took from the 1920s to the 1980s before technologically maturing into a slow innovation business. Information and technology are maturing much faster in today's world.
The repercussions of things like business cessation and deflation are that even fast food earnings are in a slump.
An important aspect of this scene is that various players in the US economic system seem not to have taken note. Medical costs and college tuition continue to rise, seemingly oblivious to the realities of the world around them. Millions of people currently can't get medical care, and if the trend continues, the various medical systems will cease to make enough money to support themselves because too few people will be able to afford insurance and medical care.
Colleges are at a critical juncture. People are at the point of being unable to afford college, and with a weak economy and companies lowering wages to remain competitive, people are growing even less able to afford college. The loans needed to get a college degree are unsupportable for the working adult - the loans become a sentence to poverty. More and more people are turning to less expensive online (Internet) education, while others simply give up hope of advanced education. College costs just keep on rising - they will eventually price themselves out of business. This transformation in education is an example of change that occurs because of technological progress.
We can hope that the down economy is a temporary situation, hope that deflation is a bogeyman that will stay under the bed and not eat us, hope that we are not competing ourselves right out of a job, and hope that the economy will return to a bullish, booming, rocketing, wealth producing engine that keeps us all buying more and more... There are other major trends that we will either have to control, or lose it.
Competition is relentless, and getting more so. We are sailing on these competitive trends into a very different world. As an example, population growth changes and its effects will create critical funding problems for government sponsored social programs from 2020 to 2040, due to the lack of people to pay, while the number of people served grows enormously. US population is expected to increase by 50% by 2050, and then is expected to remain stable. After ~2025, the slowing rate of growth should become very noticeable. Consumer demographics will also change dramatically. As population growth slows, market expansion will be driven by strategy only, not new consumers. Most businesses realize that it takes ten times as much effort and cost to convert a consumer than to sell to a new consumer, and as competition intensifies it will be even more difficult to convert consumers to your product.
The average age will continue its upward march. Average life expectancy will make substantial gains due to medicine and life science, with an average expectancy in at least the 90 to 110 year range - if your skin doesn't get too thin to support life. The family years, which gives us the heavy consumerism push, will decline, while the older population will increase dramatically. Countries like those in the Netherlands already have slow or no population growth - those markets aren't expanding. Immigration might provide the only source of expanding markets.
While our markets decline with the population, we will face an even greater threat. High population countries like India and China, and countries with high population growth rates, like Sub-Saharan Africa, will come of age in manufacturing and technology, with the ability to compete in all markets. Western Companies will be faced with non-expanding local markets and hard to enter foreign markets. The competitive pressure of today will seem insignificant in comparison. With these market conditions, it will become very difficult for people to support a reasonable standard of living, and carry the load of social programs.
If we can't learn how to control the economy so that it meets the challenges and keeps on working for us, the combined effects of wage erosion and deflation, burgeoning (but necessary) social programs, loss of markets, job exportation, and extreme competition, we will likely all be reduced to poverty. For the next few years, competition will eat us one by one, with a final gluttonous feast beginning in about 15 years, until there is no one left with the ability to buy or sell - the trends spell economic disaster and chaos.
Hope springs eternal
Is there any hope? I'm not a gloom and doom person, I'm a reality person who remains optimistic because there is reason for optimism. Capitalism, and competition, work well where there is a level playing field, as it does between the US and Europe, as long as the competition doesn't become excessive and destructive. Fortunately wages will begin to even out internationally, and transportation costs will likely become the determining factor for where goods are produced and sold. Competition is likely to be local for most common goods. But this will depend on our ability to gain control of the more negative tendencies of the capitalist system - right now gains in productivity come less from technology and more at the expense of our jobs, and if we don't have jobs we can't buy anything so the economy breaks down. The challenges we face are large.
Unfortunately for the "absolute free trade" fanatics, some things have to be restricted or an industry crashes. Most likely the trading blocks that are developing today, such as the European Union (EU), North American Free Trade (NAFTA), Mercusor in South America, Association of Southeast Nations (ASEAN) in Asia, and probably Russia (with Germany?), the Orient and Middle East, African... will limit the ability of businesses to move in, steal the market, destroy jobs, and plunder the economy. Goods and services that can be produced within areas will be produced there, preserving jobs and the economy. The future internationally traded commodities will probably be the result of specializations, and also those types of production that are inherently inefficient in an area. The "wild and free," but self-destructive, free market will have to make some tradeoffs to save us from excessive competition that destroys us.
There is great hope if we realize that we can make capitalism work well for us. The challenges for capitalism are in leadership, recognition of our common values and goals, production flexibility, and exerting control when necessary - the subjects of Article 7.
Article 3 footnotes, references, bibliography
1. Kissinger, Henry. Does America Need A Foreign Policy?: toward a diplomacy for the 21st. Century. (Simon & Schuster, 2001.) p215.
2. Ibid., p216.
3. Ibid., p217.
4. Robyn Greenspan, Perceptions of Trust. Clickz stats. February 13, 2004.
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