You probably knew this intuitively but it's nice to have it laid out on one page.
From Nicholas Colin's LinkedIn a couple months ago:
Most people think capitalism and the market economy are the same thing 🤔
They're not. Understanding the difference explains much of what's happening in the business world, and the economy in general.
📉 The market economy is deflationary by design. It's the world of merchants buying and selling, taking thin margins as products pass through their hands. Competition drives prices down, quality up, and profits toward zero. Think restaurants, retail, most service businesses: endless competition where everyone fights for scraps.
📈 Capitalism is the opposite. It's about escaping that competitive pressure by inserting capital into the production process to generate increasing returns. Capitalists don't want to compete. They want to win once and keep winning.
This insight, by the way, comes from French historian Fernand Braudel (pictured), though Peter Thiel later rebranded it (without attribution) as "competition is for losers."
🍔 Consider McDonald's. The chain's legendary founder Ray Kroc didn't succeed by making better burgers. He succeeded by owning the real estate and licensing the system. Two sources of increasing returns that gave him a "grip" over franchisees while avoiding restaurant-level competition.
🛍️ Amazon operates similarly: they don't just run a marketplace (competitive) or just sell their own products (competitive). They do both, plus AWS. The grip across multiple value chain links creates increasing returns that pure retailers can't match.
Most businesses remain trapped in the market economy, optimising for better features, lower prices, faster delivery. All the things that markets reward. But these lead to a race to the bottom.
The winners escape into capitalism. They use capital (whether financial, technological, or informational) to create increasing returns that make direct competition irrelevant. Network effects, data advantages, platform dynamics are capitalism's modern tools.
When capitalism works too well, it attracts new entrants who restore competitive pressure. So capitalism indirectly contributes to deflation, but that's really the market economy fighting back. Cc Tal F.
The state steps in when neither works: regulating natural monopolies like telecoms, running services like air traffic control that can't be safely competed, or funding education and childcare where even capitalism can't generate sufficient returns.
Understanding which dynamic dominates helps explain why some sectors see relentless price pressure while others generate sustained excess returns.
As for the current reflections about AI's impact on the economy: they should focus less on what jobs will disappear, more on where in a given industry AI will make it harder / easier to play the capitalist game. Cc Raphaelle d'Ornano
I explored these themes in my 2019 analysis of capitalism and nation states and my 2020 piece on what capitalism really means. Links in comment...
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The author's Drift Signal substack
And the referenced 2019 post.
