The Logic of Extraction
Despite happy talk from corporate chieftains (and their friends in government), deep flaws in the American economy are becoming harder to ignore. Two recent articles have been particularly insightful.
First, despite America’s self-image as a crucible of cutthroat competition, our top businesses specialize in eliminating rivals. As Lina Khan and Sandeep Vaheesan observe,
Since the early 1980s, executives and financiers have consolidated control over dozens of industries across the U.S. economy. . . . [This strategy] has even become a basic formula for successful investing. Goldman Sachs in February published a research memo advising investors to seek out “oligopolistic market structure[s]” in which “a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.” Goldman went on to highlight a few markets, including beer, where dramatic consolidation over the past decade has enabled dominant companies to use their market power to extract more from suppliers and consumers — and thereby enrich investors.
Of course, Goldman had its own angle on the beer—a commodities shuffle to make money off the 90 billion aluminum cans consumed in the US each year.
Khan & Vaheesan are right to focus on finance as the key driver in the transformation. Gautam Mukanda has explored how leaders in the sector have enforced a short-term, extractionist mindset on US industry:
Pressure to reduce assets made Sara Lee, for example, shift from manufacturing clothing and food to brand management. Sara Lee’s CEO explained, “Wall Street can wipe you out. They are the rule-setters…and they have decided to give premiums to companies that harbor the most profits for the least assets.” In the pursuit of higher stock returns, many electronics companies have, like Boeing and Sara Lee, outsourced their manufacturing, even though tightly integrating R&D and manufacturing is crucial to innovation.
Clayton Christensen argues that management’s adoption of Wall Street’s preferred metrics has hindered innovation. Scholars and executives alike have criticized Wall Street not only for promoting short-term thinking but for sacrificing the interests of employees and customers to benefit shareholders and for encouraging dishonesty from executives who feel they’re being asked to meet impossible demands.