The Macroeconomics of Scale — The Highlander Effect, and How to Save Capitalism from Itself

The Highlander Effect

You’re not imagining it: Big companies have an advantage, just because they’re bigger. And they gain ever more advantage not by doing things better, but just by getting bigger. Which gets easier, the bigger they get.

The bigger a company gets, the faster it gets bigger by destroying or acquiring the competition. So it grows, leverage size and resource advantage as it goes, until all competition is dissolved, absorbed or killed in its cradle before it becomes a threat.

In the end, there can be only one.

This is a phenomena our far leftist friends tend to refer to as “Late-Stage Capitalism.” But we could colloquially term it the Highlander Effect. Or Weyland-Yutani, depending on your bent toward sci-fi.

The fact that capitalism is inherently a self-destructive, auto-cannibalizing enterprise is pretty well-known. It’s why we developed anti-trust laws in the first place. Unfortunately, these laws, no matter how comprehensive, are ultimately just a finger in the dyke of our ever-imploding capitalist system. No matter how much we shore it up, no matter how much we fight against it…in the end, there can be only one.

The Highlander Effect works using many different mechanisms. Some subvert anti-trust laws, others just ignore them completely. But, rather than get into a university-level discussion on business and economic theory, it’s probably best to get into this one by following example. An all-too-common one, as it happens.

Walmart vs. Mom & Pop

M&P is a small outfit; two owners and a couple of cashiers. Walmart is the single largest retailer in America. Let’s see how they go about stocking their shelves, and how much each makes on a jar of peanut butter.

When Mom wants to stock the shelves with peanut butter, first she has to call up Jiff. She pays standard $3 each to Proctor & Gamble for five jars of Extra Crunchy. Then she pays to have it shipped from where it’s made from Lexington, KY to Ocala, FL. Mom pays the load broker, truck company owner, dispatcher, driver and maybe a few warehousing fees between. All of that adds $1 a jar to her cost.

Finally, she gets the Jiff to her back door, and has to pay someone to carry it off the truck and to the shelves. There, Ma’s five jars sit as she hopes for customers before they close at 5 pm. M&P isn’t in the best location and can’t afford advertising. They can barely afford to pay the landlord…let alone staff after 5pm.

So, there that $5 jar of peanut butter sits until someone finally shows up to buy it two days later. Customer hands money to the cashier, cashier gives Mom the money, and she counts it before giving Uncle Sam 30 percent of the $0.25 profit. Pa don’t do taxes. That’s what they pay H&R Block for.

She clears $0.17 cents per jar of Jiff. 

Now, let’s flip over to Walmart and see how they clear 15 times more per jar on that exact same product. 

Product purchasers at Walmart corporate call up Proctor & Gamble to negotiate for some Jiff. Nothing out of the ordinary; Walmart orders 275,000 jars of Extra Crunchy a month. They’re P&G’s biggest customers, and Walton Jr.’s nephew’s wife sits on the board at Proctor; so Walmart gets Jiff at $0.75 a jar this quarter.

Walmart dispatches its own trucks to Lexington, and ships back to its own distribution centers. From there, the peanut butter arrives in Walmart stores. It gets offloaded by forklift, tagged and taken by the pallet to store shelves.

There, intoxicated customers show up at 1:33 am to buy it. Because, after a couple 50mg edibles, what else do you want besides Extra Crunchy Jiff? They stumble to the robo-registers, try for ten minutes to pay using gas station receipts, and finally catch an Uber home. That’s the 17th jar of peanut butter this Walmart sold tonight.

Corporate records the sales, and an army of in-house accountants go to work on finding tax loopholes. They get the taxes on those 17 jars down to 0.6 percent, because somebody upstairs bought off a Senator.

Ultimately, Walmart makes $2.75 per jar for all 17 sold; about 15 times more than Mom and Pop. Walmart’s total daily profit on peanut butter: 275 times Mom and Pop’s. Not by selling better peanut butter, or even cheaper. They made more money, just by being bigger.

And what does Walmart do with all this extra profit? Of course, they buy Mom and Pop’s property from the landlord, and turn it into a Murphy’s. Where peanut butter sells for $5 a jar.

And Ma works for minimum wage.

The Day Capitalism Died

Without over-analyzing, you see how the Macroeconomy of Scale works. Big companies have the resources to reduce cost, and increase their competitive advantage through labor reduction, keeping everything in-house, and using purchasing leverage to reduce cost further. Then they use those profits to drive others out of business, and so the Highlander Effect goes on.

Once a company reaches a certain critical mass of economic power, the reaction effectively becomes self-sustaining. A nuclear meltdown of capitalism.

When you get enough companies reaching this critical mass, all interconnected by a series of subsidiaries and co-investors…very soon you get a de facto monopoly, here it becomes impossible for small business to compete against large. In any industry, ever.

This macroeconomy is the single largest component of the Highlander Effect. It’s what allows large companies to grow almost exponentially, destroying competition and taking advantage of scaled relationships and co-investorship to form a single effective organization.

And that was how capitalism died.

What Can We Do?

What is the solution? As we can plainly see, anti-trust laws don’t work. They take too long, are too limited in scope and can’t hold back the insurmountable advantage large companies maintain over small. These laws really only go into effect during major corporate mergers; and as Mom and Pop found out, Macroeconomic Scaling happens on much smaller and more local levels. Once Anti-trust laws kick in, it’s far too late to undo the damage done by the corporation’s initial market domination.

The only way to interrupt the Highlander Cycle is by placing limits on Macroeconomic Scaling; to make it so that past a certain point, it doesn’t profit a corporation to grow any larger. Or, not enough that they’ll undertake some of the more destructive methods of growth and acquisition. We have to give small business a competitive advantage against large, if only to mitigate the advantages of just being large. Force Walmart to compete directly against Mom and Pop, without simply relying on its overwhelming resources to drive them out of business.

Small business needs an advantage. They need a helping hand. I have a few ideas for that in terms of corporate tax plans and small business assistance. One way or the other, it’s going to take serious, game-changing structural reform to keep capitalism from eating itself alive.

In the end, there can be only one…the rest of us just work for them.

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