In late 2023, Geert Noels, CEO and founder of Econopolis and former partner and chief economist at Petercam, joined CBS Professor Stijn Van Nieuwerburgh to discuss economic gigantism. This subject serves as the focal point of Noels's latest book Capitalism XXL: Why the Global Economy Became Gigantic and How to Fix It.
The trend for bigness goes beyond businesses: schools, hospitals, libraries, and other organizations have consolidated. A larger entity can seem attractive for its short-term financial gains, but the results may produce social costs.
Rather than advocating for the dismantling of the capitalist system in favor of neo-Marxism, Noels argues that we must instead return to the roots of capitalism and embrace its traditional principles, as articulated by Adam Smith in the eighteenth century.
Read a transcript of the conversation below:
Stijn Van Nieuwerburgh: Good evening everyone. My name is Stijn Van Nieuwerburgh. I'm a professor here in the finance department. I'm a professor of real estate at Columbia Business School. For those of you for whom this is the first time coming to our beautiful new building, we've been here for the past couple of years.
What you may not know is that at the time that we opened this new building, we also opened a new initiative, which is called The Hub. And The Hub is essentially our internal think tank, where we talk about problems relating to business and society. And where we invite policymakers, business leaders, authors, community members essentially, to interact with us about problems that are of importance to society. And it's very much in that context that we meet here tonight to talk about what has happened to the economy, not just the US economy, but sort of the global economy and the economic system, our capitalist economic system. And we're incredibly pleased to have with us tonight here, Geert Noels. Geert is an economist, a business leader, as well as an author. And today we're going to talk about his book called Capitalism XXL, which was translated into English, from Dutch into English, this year.
So by way of background, Geert studied applied economics at the University of Antwerp and University of Leuven in Belgium. He obtained his MBA in Lisbon as well and started his career in auditing and then transitioned to the research division of the Belgian Federation of Employers and later to a large Belgian asset manager called Petercam where he became chief economist. In 2009 he founded his own firm Econopolis, where he is the CEO. Econopolis is both an economic consulting firm as well as an asset manager.
Geert appears very frequently in the Belgian media, written media as well as TV on all things economics. He was actually voted one of the top 10 intellectuals in Flanders by a large Belgian newspaper recently. And like every good Belgian, Geert is an avid cyclist. The other thing I should mention is Geert was a prominent adviser to the Belgian Ministry of Finance during the financial crisis as well as in an earlier financial crisis. So he is definitely very well connected in Belgium. Welcome Geert. Thank you. So let's get into it.
So the basic premise of Capitalism XXL, which the Dutch title is gigantism. And it turns out gigantism is an English word as well. It's the name of a disease, and it's a disease whereby organisms' bodies are growing sort of beyond bound — they're growing too much. Cells are growing — think of cancer, sort of multiplying. And it's basically sort of a metaphor for our super -sized economy that we have today. Call it morbidly obese — we're familiar with these problems in the United States of America, right. So Geert, can you tell us a little bit about what are the symptoms that typify this disease, this gigantism disease.
Geert Noels: Yes, thank you Stijn. Well most known is of course the big giants. They've grown so large that they dominate the economy, they dominate the stock market. A lot of data now shows that it's historically even exceptional what we are going through. The stock market capitalization of these big tech firms is larger than the capitalization of the whole Eurozone for the first time now. Other things that have been illustrated or documented is the market power of these companies in terms of margins and so then going to economics that this is unhealthy. They can have margins that indicate some market power that disturbs let's say normal competition.
They have an impact on things like productivity. Seems that because of lack of competition, the whole productivity gains are not coming through. But in my opinion, they also have societal consequences. I have a lot of data in the book where you can see that, for instance, let's say, tendency of organizations growing very large is also something that you see in hospitals, libraries. I have some data on schools and universities and we can come back on it, but for instance, in schools, large entities create a lot of negative societal consequences. So, it's something that dominates the whole world economy and society and therefore I thought it was interesting to elaborate on it and also think about what are the consequences because you know in Europe there's a lot of criticism on capitalism. I don't know how it is in the United States but the degrowth movement is very strong in Europe. They reject capitalism — a lot of neo -Marxist theories are developing. I don't know how close you are to these movements.
So we need to defend, I think, what's sound for the economy and society. And in my opinion, capitalism is still the best system. But then it has to be sound capitalism. And therefore, we have to think about what is real capitalism, what is sound capitalist, and what are the things that have grown unhealthy and have led to what I call gigantism. And I hear that in English it doesn't sound well, so it's capitalism XXL. So that was the reason for writing the book.
Nieuwerburgh: So you talked about size. You talked about concentration. You talked about markups, market power. There's also this sense of decline in business dynamism, sort of fewer young companies. Anything else you sort of want to say about that?
Noels: In terms of cartels, what we see is that Europe has been much more severe on limiting the existence of cartels. And so cartel penalties are much heavier in Europe and they seem to have been neglected in the United States. Also, things like predatory acquisitions so that big companies start to buy preemptively promising young companies.
It's a bit like in sports terms that they buy a whole team of promising athletes before they can form a group or club that could compete with them. So it's very unhealthy in my opinion. I think the cartel issue is really worrying. In the book probably the tipping point has been around the millennium, the whole Microsoft case. And I dig deeper into the Microsoft case because you know that at that time there was a decision to break up Microsoft in three pieces and it has been reversed. And that was in July 2001, just before 9 /11, but already in the process of the technology crash. But the consequences of this have been huge on of course, the development of the tech giants later on. And so we unlearned in a certain way that breaking up oligopolistic systems or monopolistic companies can be healthy for the capitalist system. And that's one of the main drivers in the corporate sector of the existence of giant companies. I can you give you perhaps also one example out of the outside of the tech sector — it's this company, JP Morgan, and there you see the market capitalization, so just as a measure of concentration, and you see how, from 2008, 2009, the financial crisis, most of the other systemic banks, they kind of flatlined and JP Morgan has grown into the only big systemic bank. It's more than 30 % of bank capitalization, and worldwide, it's 7%. And then you get a kind of feeling also of what it could mean in terms of not only impact, but in terms also of market, the working of the market itself. In some niches, there is no competition anymore. JP Morgan is the market.
And so then you also get counterparty risk of, let's say, there is no counterparty anymore. And then who will save JP Morgan when anything goes wrong? You're going back almost to 1913, where before the Federal Reserve was created. Morgan was the central bank. It seems that this year, you know, with the bankruptcy of the Silicon Valley Bank, where J .P. Morgan was asked to save the banking system that we were back to 1913, or before 1913, before the existence of the central bank, that you ask one bank to save the system. So it's kind of an exceptional situation.
It's not only financial, it's not only tech, it's also in the pharma sector, a lot of concentration in the food sector — seven or eight companies that that dominate the whole food sector. It's a big issue.
Nieuwerburgh: Tell our audience a little bit about what you call the Champions League Effect because I think that's sort of a nice way to put it.
Noels: Do you know the Champions League? Who knows the Champions League here? Who is a soccer fan? Well, you know the Champions League is kind of the super league for the best soccer clubs in Europe. Barcelona. Who knows Barcelona? Manchester City, PSG, Liverpool. But once upon a time it didn't exist and smaller clubs they could go very far.
Belgian clubs for instance I have my colleagues here like Brugge or Antwerp or Wanderlicht they ended up with the best four or the best two or even one champion.
And then something changed. The game didn't change but the way the competition was organized changed and what I mean by the Champions League effect can be best illustrated by making the ranking of the clubs from the small countries and the clubs of the big countries . So when the competition of the big clubs started, it became like the competition of clubs for the big countries. So you can see how quickly it adjusted to a competition of the big clubs, where entering the league is almost impossible for the clubs of the smaller countries. And this kind of Champion's League effect is also what you see, for instance, in the food industry or in the pharma industry. Once you are so big and you're in the Champions League, it's very difficult to re -entry. Also, because they do kind of predatory acquisitions — some of the most promising players from the smaller competitions are bought preemptively at a very young age. Some of these clubs have enough talent to form a second team that can play in another competition and become a champion. So then you see it's not about the game, it's also about how we organize the competition. And I consider economics or the economy like the game we play. Everybody's playing the game and we change the way in which the competition is organized. And then a lot of people start to feel disconnected with the game. They tend to feel that it's not fair, that their club doesn't have a chance to become champion or compete in the same fair way. And then I think that the societal effect starts to unfold and that's a reason why I stress on the Champions League effect.
People reject capitalism because they do not understand that in a way capitalism can be a very fair way to organize the game. But they see a kind of unfair capitalism in which the big ones always win and the smaller ones, even though they are very talented, they lose a talent and they lose the edge to become one day a champion themselves. And that's why we have to think about fair capitalism, humane capitalism also, before larger groups of the society start to reject capitalism. And I don't know how it is in the United States, but in Europe it's a big movement. They really start to reject the capitalist system.
Nieuwerburgh: So let's talk a little bit about that. So you talk in the book about fake capitalism, right? Sort of capitalism that's capitalism in name only. But if we go back to John Maynard Keynes and to Adam Smith in fact, right, it's no longer satisfying the sort of the vision that Adam Smith had for capitalism.
And in particular, in your book, you point out the sort of these two big problems with our modern version of capitalism, right? One is these oligopolies and monopolies that you described. And then the other one is the rent seeking that is happening by these large players. So can you tell us a little bit more about that and sort of how we strayed from Adam Smith's ideals and sort of why that matters?
Noels: I don't know if you read books of Adam Smith. I did, but I have to say that I rediscovered Adam Smith when writing Capitalism XXL. He's famous for The Wealth of Nations, which is his most famous book. But long before, he wrote The Theory of Moral Sentiments. In fact, he's a philosopher in training, and he became an economist. And Adam Smith, he was very much worried about the moral consequences of an economic system. And I tried to summarize it because he highlighted two important things.
He said if an economic system wants to be fair and wants to be considered as also moral, we have to be careful of two things, two things only.
He warned for cartels. So competition should be fair. And every time there was an indication of cartel formation, the government should intervene. So that's the first. You can read it throughout his books, always mentioning the fact that the system, you can let it go, you can let capitalism go a whole way, but you have to be careful of cartels. And the second one is, you could call it crony capitalism, that the distance between companies and politicians would become tight, so that you have to be careful to keep some distance between politicians or policy makers and the corporate sector.
And that's what I think has changed with John Maynard Keynes, who saw corporations as a tool to achieve some policy objectives. And of course the time in which John Maynard Keynes was active was in a period, first of all, just before the war, a heavy crisis, and then there was a war economy, and so there was a reason to use bigger corporations or the largest corporations to execute a policy that had to be achieved quickly, efficiently, because there was an urgency. Now, I think that he is at the level of, what I call gigantism because he believes that the big corporations would do it more efficiently and because of the trickle -down effect, also the smaller ones would benefit from it. And what we have seen, for instance, in the European economy is that this kind of Keynesian policy, big funds, every time there is a kind of crisis — lately we saw it with COVID — a big fund is created and then the big corporations are asked to get the funds and spend it. But there is a lot of corruption. There is a lot of let's say funds that are wasted and I see this as a conflict between Smith and Keynes. I think we have to rediscover Keynes and also think about the moral consequences of an economic system, and also think about a Keynesian policy that can be very good in certain circumstances, but has the drawback of leading to this growing capitalism. That in fact, governments pursue a tight liaison or tight relationship with the big corporations. And in Europe, this is a big problem.
I think in the U .S., it's also a problem, but because lobbying is so intensive. In the book you will find data on the number of lobbyists in Washington, for instance, it's huge. And so we are not aware anymore of the importance of keeping such a healthy distance between corporations and policy makers. I think we are really in the heart of one of the most important capitalist problems at this moment.
Nieuwerburgh: Absolutely. So let's switch gears a little bit. As we discussed, you see our current system and the growth, the gigantism in our economy, sort of the result of both the monopolies as well as sort of this crony capitalism. I think there's a lot to be said for that. The rules and regulations are favoring these large firms and I think that includes things like product market regulation, lack of pro -competitive product market reforms, weaker antitrust enforcement, which we talked about with these penalties, more lobbying as you just mentioned
