Letter 48

Consider a "Wheel of Fortune" in a carnival. You bet on a particular number coming up, and if you're right, you win a prize.

Now, the prizes, taken as a whole, aren't worth as much as the bet you made, so that even with a "winning" result, you lose money. This is how most carnival wheels, guess your weight scams, etc. work. You bet $5 or so, and most of the prizes cost the operator $3. Even with a perfectly honest wheel, the operator is making money, and the longer you play, the more money they make.

Let's assume that the operator decides its time to get out of the business. They sell the wheel and the inventory to someone else. In order to make back the purchase price more quickly, the new operator decides to rig the outcomes very slightly by "adjusting" the wheel. They make more money, and the business becomes more valuable. The new owner sells at a profit.

The newest owner needs to make back the higher purchase price, so...

This is how a dishonest system becomes more dishonest over time. It's a one-way process, as nobody wants their operation to become less profitable, and less valuable on the market than it was in the last sale.

We see many examples of this. There's a term for it when referring to online enterprises. "Enshittification." The pressure to always get more profit from the same system or product at every transaction means that less utility is delivered to the end user over time.

Insurance companies, always under pressure to increase profits and more profit to shareholders, pay out less. Goods become more cheaply made, even as prices go up every year.

Every publicly traded enterprise and the products they make are subject to this pressure. More money for cheaper goods and shoddier services is the rule, not the exception. Therefore, since every concern is subject to this pressure, competition has a very limited influence on this process. The clothes that you buy from any given retailer is likely to fall apart more quickly than those you bought ten years ago, regardless of who you buy it from. Every airline has more delays and worsening service, regardless of which airline you choose.

You can resist this by trying to buy, as much as possible, directly from the person who made or grew what you are purchasing. But since the "enshittified" goods set the market, even these goods are subject to pressures to produce lower quality goods at higher prices. Predatory pricing by large firms who can afford to drive smaller concerns out of the market by temporarily selling at or near a loss, then raising their prices once they're the only game in town. Anyone who has ever had Wal-Mart invade their town and drive all the small stores out of business, only to see the Wal-Mart raise its prices once they've cornered the market has experienced this first hand.

This is the real driver behind the endemic inflation we see in the U.S. market. Breaking this dynamic is a complex proposition. Limitations on predatory pricing, taxing windfall profits and limitations on stock trading can ameliorate this, somewhat, but as long as Wall Street owns the world, and is allowed to use its wealth to prevent meaningful regulation, the process will continue.

What happens when prices get so high and quality is so shoddy that no one can afford the goods anymore? Well, that doesn't appear anywhere on a quarterly report. It's going to get a lot more "enshittified" before it gets better.