One of the wondrous and often underappreciated features of a capitalist system is its ability to create new products and values that enhance our lives in ways we did not expect. What is even more exciting is that the free market does this in direct defiance of one of its critics’ most common claims about how competition works. The charges that free markets lead to destructive competition, dog-eat-dog conditions, and cut-throat business “wars” over consumer dollars have been recycled again and again over the years. Capitalist competition is alleged to bring us worse and cheaper products from manufacturers who squeeze profit from us as we long for the days when better goods existed. The idea that dominant corporate players will repeatedly slash prices or operate at net losses to drive out smaller firms is one basis for the antitrust laws. In the real world, even where fully free markets don’t exist, the opposite tends to happen.
Consider Starbucks. As Virginia Postrel notes in a recent piece highlighting the company’s 50th anniversary, the growth of retail Starbucks locations, which began in earnest only 30 years ago, has led to a downright boom in independent coffeehouses. Yes, that’s right, the dominant firm that went from only 165 locations in 1991 to about 15,000 today hasn’t actually squashed the local independents or smaller competitors. Instead, it has created a wave of new demand for coffeehouses in general. Those 165 Starbucks in 1991 were only 10% of the nation’s total. Today, Starbucks accounts for about 40% of the total, but that total is 14 times larger than it was in 1991. In other words, Starbucks has helped create and sustain an unprecedented demand for a novel product—the coffeehouse—that now embodies more variety and market choice than it did prior to their aggressive growth. As Postrel notes, “Starbucks took a specialty concept and made it a mass phenomenon, with several lasting effects on American business and culture.”
Though esthetes and snobs may dismiss the interior of your average Starbucks, Postrel rightly notes former CEO Howard Schultz’s commitment to a higher-quality multi-sensory experience raised design standards across the retail sector. “If your dream is to open a neighborhood restaurant,” Postrel advises, “you’d better budget for making it look good.”
Likewise, the massive growth of coffeehouses generally, Starbucks included, has broadened the average American’s landscape for “third places”—the non-work, non-home, informal community environment that sociologist Ray Oldenburg credited with helping to maintain civil society and social engagement. Thus, as Postrel points out, the modern coffeehouse has become a preferred location “for first dates, Craigslist sales, even job interviews.” Even more than students cramming for their next exams who inhabit the typical coffeehouse, which is a fairly constant feature of coffeehouses, I’ve seen everything from local senior groups to youth Bible study, tutoring sessions to real estate presentations.
She concludes her piece with an appreciation of the “third wave” coffee houses that have cultivated a connoisseur’s approach, focusing on the artisanal craft and broad knowledge of an ever-growing world of coffee. But the effects on the market extend well beyond those cited by Postrel. Not only has Starbucks’ growth facilitated an expanding space for its direct competitors—namely, other coffee house retail locations—but it has transformed coffee in unexpected places. Think about the places you’ve always been able to get coffee—a fast food joint, a gas station, a truck stop on the interstate, a greasy local diner, a fine dining restaurant. In every case, the kind of coffee, the variety of coffee choices, and the quality of coffee in every one of those places has improved since Starbucks exploded onto the retail scene. Whether a McCafe Americano or a Buc-ee’s Blend is to your liking or not, there are many who swear by them.
What is most striking about this downright revolution in how coffee is made and consumed in America today is that it hasn’t really affected the total amount of coffee that we consume. As you can see from the chart below, American per capita coffee consumption peaked in the 1940s and has been declining since. Discerning readers may note that this chart ends in 2005, but recent data confirm that the trendline hasn’t changed much since. (The slight dip in carbonated soft drinks turned into a rather precipitous decline against the background of a growth in bottled water and energy drinks.)
On deeper reflection, though, the rise in bottled water, energy drinks, and other “boutique” beverages tracks with the creative forces unleashed by the competition for coffee drinkers. The so-called coffee wars that pitted Starbucks against other national chains like Dunkin’ and Coffee Bean and Tea Leaf, as well as regional powerhouses like Dutch Bros., Peet’s, or Caribou, led to a change in consumer taste and behavior. It created new opportunities and new outlets for entrepreneurial energy, whether that ended up being popular cold brew brands that feature on grocery shelves or innovative single-cup brewing machines. The rise of mass customization—the ability of consumers to benefit from both the efficiency and low-cost aspects of mass production but also the uniqueness of custom or bespoke goods—has tracked well with the advent of coffee culture. This is not the era of “any coffee you want, as long as it’s black.”
Do trends in coffee consumption and the growth in coffee houses as gathering places tell us much about capitalism? If we focus our attention on the wider processes involved and the conditions that make them possible, they certainly do. Why not? After all, coffee and coffee houses helped spawn the Enlightenment and Scientific Revolution.
The process of competition in a market system is a process of discovery, creativity, and construction. When rival firms compete in open markets guided by the rule of law and absent cronyism or preferential regulation, they produce more goods and services and uncover new ways to create value. The most cutting edge and innovative competitors continuously search for products that their customers don’t even know that they want. Another obvious case is the rise of the smartphone. In the 1990s, when the first devices appeared as prototypes and clunky beta versions, few people could imagine how the market would develop. The industry went through its own phase of intense competition in the late 2000s and early 2010s until touchscreen smartphones became ubiquitous and prosaic.
Even in this complex field, where multinationals like Apple, Samsung, Huawei, and others can marshall massive resources for constant innovation in these high tech devices, and notwithstanding the decline of Nokia, Ericsson, and Blackberry, there nevertheless remains a fairly hefty group of smaller competitors who are thriving on the long tail.
Like the diversification of the beverage market and the rise of concern about retail aesthetics sparked in part by Starbucks, the truly creative and constructive outlets of the competition between smartphone manufacturers arose in unexpected places—from the app developers who are driving a multi-billion dollar economy of their own to the creative types around the world who are building an entire creator economy as users of the apps built by other people and firms on the smartphones built by yet other firms. The spillover effects are likely far, far more widespread than this.
Yet none of this can happen without the remarkable conditions that not only allow but facilitate this kind of innovation, namely free markets and the protection of individual rights. Those are the conditions that make possible the life-enhancing advancements that only happen in free societies. Without the freedom to innovate, take risks, and challenge old ways of doing business, and without the protection of free speech, property rights, and corporate forms of organization, the untapped potential that competition can unleash is stifled. To paraphrase the eminent historian Niall Ferguson, who put a related point so eloquently a decade ago, without capitalism and its creative and constructive competition, there will be geniuses we may never know.