The benefits and detriments of competition have been contested since the emergence of the earliest market economies. Before we discuss your books, can you begin by adumbrating the evolution of the debate on competition in economics?

The appreciation of the importance of competition—and the perennial threats it faces—has been with us since the beginning of modern economics. In The Wealth of Nations Adam Smith famously argued, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” This is a critical insight because it shows how decentralized actors can make decisions based on their own interests that collectively add up to improvements in society. If you stopped here, it would be an argument for an extreme form of laissez faire.

But Adam Smith did not stop there. He went on to warn: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Economists have spent the last 250 years improving their understanding of how this “conspiracy against the public” can happen, how it can have consequences even beyond higher prices, and what can be done about it. This evolving understanding has at times been reflected in the legal and political system; and, at times, ignored in the legal and political system. 

After 2000, market concentration in many sectors of the economy and fears about a lack of competition became an area of increasing concern for many. How did you view and confront these challenges as the Chair of President Obama’s Council of Economic Advisers?

I was very concerned about two major trends in the US economy: reduced productivity growth and increased inequality. These combined to contribute to the dramatic slowdown in the growth of middle-class incomes in the last 40 years. I was constantly looking around to better understand the causes of these problems as well as to find solutions.

“I was very concerned about two major trends in the US economy: reduced productivity growth and increased inequality”

I do not think there is any one cause or any one solution, but I became increasingly interested in the potential role played by the increased consolidation we were seeing in so many industries, like the fact that most Americans get their beer from two companies, or have only one or two local hospitals to choose from. In theory, this could help explain slower business investment, reduced productivity growth, and increasingly skewed incomes. I gave a talk at an event in honor of the fiftieth anniversary of Joe Stiglitz’s teaching in 2015 where I speculatively outlined a number of these ideas.

Since then, a wide range of research has provided further evidence for these speculations but also raised further questions. The issue has become so mainstream that it was the subject of a chapter in the International Monetary Fund’s recent World Economic Outlook and was the main subject of discussion at the Jackson Hole conference for central bankers in the summer of 2018.

Having diagnosed lack of market competition as an issue, the next question is: what to do about it?

In part, the answer is more vigorous antitrust enforcement. In part, it may be to expand the antitrust rules. But competition is also about a broader mindset than just narrow antitrust; it shows up in a wide range of areas from occupational licensing to land use restrictions to regulatory policies.

That brings us to your first recommendation, Saving Capitalism from the Capitalists by Raghu Rajan and Luigi Zingales. When this book was first published in 2003, Mark Zuckerberg was fiddling with Facebook in a dorm, and Donald Trump was between his fourth and fifth bankruptcy, before the premiere of The Apprentice. Can capitalism still be saved from capitalists?

At the risk of offending every economist friend of mine who has ever written a book, this is my favorite title of any economics book, the one I most wish I had come up with. And it’s an excellent book, too. The basic thesis is that capitalists—like the CEOs that run major corporations—do not actually like competition or markets. They like to be insulated from competition, to receive subsidies from the government, and inside the corporation it is more like Soviet-style central planning than the stereotypical American capitalism. Rajan and Zingales hate this. But they love markets, competition and capitalism, and see capitalism as a powerful force for allocating resources and propelling innovation. This leads them to want to save “capitalism” from the “capitalists”.

I have met a lot of CEOs in my life and I have to say this idea resonates with me. I often find myself more excited about markets and capitalism than they are. 

In some respects, Rajan and Zingales’ argument comes out of the notions of regulatory capture developed by James Buchanan and popular with the laissez faire crowd at the University of Chicago (where Rajan and Zingales were) and elsewhere. The argument was industries would capture their regulators and use them to protect incumbents. The solution proposed by Buchanan was very limited government with very little regulation.

What makes Rajan and Zingales so interesting?

They go beyond simplistic analysis. They appreciate the ways in which government needs to be active if it wants to save capitalism from the capitalists, including active competition policy, financial regulation, a social safety net, and investments in education. The framing and specifics defy some of the typical left-right characterizations.

Turning to a treatise by Albert Hirschman. Why did you choose Exit, Voice, and Loyalty as a book on market competition?

Economics is largely the study of what the brilliant Albert Hirschman called “exit.” If you don’t like a product, you stop buying it and instead purchase an alternative, exercising your ability to exit the product. Giving consumers multiple options is essential for ensuring their ability to exit any given option, something that both restrains prices and can also promote innovation and expand quality and choice.

Support Five Books

Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount.

Hirschman, however, points out that in society more broadly, and even in the economy specifically, “exit” is not our only option—we also have voice. We can complain about a product in an effort to get it improved, either because we are loyal to a product or because it is a monopoly we have no choice about using—think your local cable provider. Unions can use voice to improve workplace conditions. Voters at the national level almost exclusively use voice to influence public policy, although there is also some exit at the state and local levels in response to the incentives associated with policies.

How does Hirschman’s Exit, Voice and Loyalty model apply to competition? 

Hirschman’s model reinforces the importance of competition because in conventional markets it is a complement to voice and critical for helping people get what they want. In this way, exit and voice can be complements; the threat of exit makes companies listen to the voice exercised by their customers. 

“In society more broadly, and even in the economy specifically, “exit” is not our only option—we also have voice”

But Hirschman also sensitizes us to the fact that too many economists, most notably Milton Friedman, reach too enthusiastically for exit solutions to everything without asking whether there is a role for voice or whether exit might undermine that role for voice. For example, competition for schools—like school choice vouchers—expands the role for exit, but may undermine the voice of key constituencies for school improvement. So, competition has an important place, but may not work everywhere.

The Antitrust Paradox by Robert Bork is your third recommendation. Why?

The Antitrust Paradox was an extremely important book, a real example of how ideas can have a major impact in the world, for better or for worse. It was an important corrective to some of the badly thought-out overreaches in antitrust policy at the time and advocated for concepts that are still relevant today.

It was written by Robert Bork, a Yale law professor who had spent the previous several years at the Justice Department. He advanced the notion that a consumer welfare standard should be central to antitrust. That is, competition policy should protect consumers not competitors. While lawyers may debate if this was the actual intent of the original U.S. competition laws, like the Sherman Act, the idea has substantial economic merit. 

How does Antitrust Paradox help us understand the trade-offs involved in market interventions?

When governments prop up failing businesses, the result is higher prices, worse products, and potentially worse jobs. Looked at this way, some practices that had previously raised concern—like “predatory pricing”—start to look more favorable because they offer lower prices for consumers and their only “victims” are less efficient businesses that cannot match the prices. Moreover, technical economic analysis offers the hope of assessing whether mergers or anti-competitive actions by businesses help or hurt consumer welfare.

Bork combined this correct general idea with a specific set of views informed by his reading of economists at the University of Chicago, most notably Aaron Director (thus the name “Chicago School”), to argue for an almost blanket presumption against any concern with many of the practices that previously had bothered the courts, like vertical combinations (e.g., when a supplier and distributor get together), predatory pricing, tying products and price discrimination. (In fairness, Bork was not entirely laissez faire and was concerned with collusion and price fixing.)

“When governments prop up failing business, the result is higher prices, worse products, and potentially worse jobs”

Bork’s reading of both the law and the economics, together with Richard Posner, a set of professors at Harvard Law School and others, has become the standard understanding of competition for judges in the United States and around the world, as Tim Wu showed in The Curse of Bigness. A generation of judges were raised on these ideas and even though the statute governing antitrust has not changed, the way courts interpret it has. It has become increasingly difficult for the government to block a merger or restrain anti-competitive conduct. Today, American courts are increasingly tolerant of three, two or even one player in a market.

Lectures on Antitrust Economics does not sound like light reading. Why do you recommend it? 

When I was Chairman of the Council of Economic Advisers, one of my outgoing staff members gave me this book as a present on their last day. Lectures on Antitrust Economics is definitely not light reading. But this book of lectures by MIT economist Michael Whinston is important reading, and it played an important role for me. 

Get the weekly Five Books newsletter

These lectures help readers understand the role of “industrial organization” in market competition. Stepping back, Bork’s economics came largely from an oral tradition in Chicago. Much of it was not formalized in models; even less was empirically tested. In the ensuing decades, the study of markets with imperfect competition was revolutionized by game theory, which takes into account how the different firms strategically take into account the actions of others, and also by modern empirical methods. It turns out many of the simple economic propositions that Bork built his theories on were actually special cases that relied on specific assumptions. For example, more general models, and empirical evidence, found that there was indeed reason to be concerned about exclusionary vertical contracts (e.g., an exclusive distributor).

Horizontal mergers are a major focus of these lectures, are they the major problem with today’s marketplace? 

Horizontal mergers are when two companies competing in the same market merge, often with one buying the other. This could be United buying Continental, or one local hospital buying another. These arrangements have the potential for efficiency improvements, but also the potential for higher prices (in contrast, price fixing collusion generally does not lead to this sort of tradeoff and only results in higher prices).

Whinston largely frames the issue, is mostly supportive of the Justice Department’s approach, but recognizes that the empirical evidence on the question is severely limited, especially retrospective studies of what actually happened to prices and efficiency after a merger was concluded. He challenged economists to come up with more of this evidence and in the more than a decade since it was published, they have obliged. 

What has research shown, since these lectures went to print?

A good summary of the evidence from retrospectives is in John Kwoka’s Mergers, Merger Control and Remedies which finds that mergers were generally followed by price increases with relatively little of the promised efficiency improvements showing up. This is the same conclusion that many of the experienced economists and practitioners in this area have reached. And this is why there is a shift in the discussion towards more aggressive merger enforcement. Although a real change would likely require either decades to shift the views of judges or legislation making it clear how mergers should be evaluated.

Your final book on competition is Radical Markets.

I love reading economics and I love reading science fiction. Radical Markets is a great combination of both. This book is by E. Glen Weyl and Eric Posner, son of the Richard who played a critical role in the spread of the Chicago School view. It centers around five ideas for promoting more inclusive growth. Each idea gets its own chapter, beginning with a fictional vignette set in the near future, depicting their idea in action and explaining the economics of the idea.

Both of the words in their title may be modest understatements. The first idea eliminates private ownership, enabling anyone to buy anything from anyone else, whether or not it’s offered for sale. Prices would be posted. People pay wealth taxes based on these prices, so overpricing possessions is discouraged. And anyone could buy anything. The wealth tax, which at 7 percent makes Senator Warren’s proposal for a top rate of 3 percent look modest, allows the authors to abolish every other tax and pay for a universal basic income. This would solve all sorts of economic problems, like “hold up”, where one person interferes with an efficient project by trying to extract the maximum benefit for themselves.

Other chapters propose other ideas, including a radical reform that would let people sponsor an immigrant who would essentially be tied to them, “quadractic voting,” which would give people a voting budget they could allocate across different issues, a plan for people to be paid for the data they provide to tech giants, and a new rule limiting the ability of large fund managers to foster collusion among the companies they hold.

None of these ideas are ready for prime time. Most of them may never be ready. But all of them have important applications and implications for how competition leads not just to a better economy but a better polity and society.

You chaired a UK panel on Competition in the Digital Age for the Chancellor of the Exchequer. The digital sector is clearly one where lack of competition is a big problem with a few platforms dominating globally. Can you summarize what you concluded in your report?

Lack of competition is not the only problem in the digital sector, and the digital sector is not the only place in the economy plagued by a lack of competition. But it is an important aspect of an important issue and I hope we showed how it is possible to make progress on it.

While the report our expert panel put forward, Unlocking Digital Competition, may not be as fun reading as some of the books we’ve talked about, in some ways it reflects many of the ideas. Like Rajan and Zingales, it is motivated by the belief that competition will lead to more choice, quality and innovation but that companies left to their own devices try to limit that competition. Like Bork, we center our work squarely around benefits for consumers. Like Whinston, we have a broader concern about some practices that might otherwise seem benign. And while we cannot compete with the Posner and Weyl’s radicalism, our ideas—which were based on listening sessions, written submissions and extensive evidence gathering—share their interest in more inclusive growth.

Support Five Books

Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount.

Our report made six strategic recommendations that could be advanced through 20 recommended actions. The most important was the establishment of a “Digital Markets Unit” that would engage in pro-competition regulation, helping to foster more entry and consumer choice by requiring a code of conduct for the most strategically important platforms, necessitating data mobility and systems with open standards, and moving towards more data openness. We also recommended several measures to update merger control for the digital era, taking into account some of the risks mergers have for eliminating potential competitors or undermining innovation. Finally, we called for greater international cooperation on these issues. I am thrilled that the UK is in the process of implementing a number of our recommendations and have also been pleased by the broader global discussion of these issues.

Interview by Eve Gerber

Five Books aims to keep its book recommendations and interviews up to date. If you are the interviewee and would like to update your choice of books (or even just what you say about them) please email us at editor@fivebooks.com

Jason Furman

Jason Furman is Professor of the Practice of Economic Policy at Harvard Kennedy School and nonresident senior fellow at the Peterson Institute for International Economics, following eight years as a top economic adviser to President Obama. He served as the 28th Chairman of the Council of Economic Advisers from August 2013 to January 2017, acting as both President Obama’s chief economist and a member of the cabinet. He has authored several books, including Who Has the Cure?: Hamilton Project Ideas on Health Care (2008) and Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes (2008). His March 2019 report Unlocking Digital Competition is available to read here.

Save for later

Jason Furman

Jason Furman is Professor of the Practice of Economic Policy at Harvard Kennedy School and nonresident senior fellow at the Peterson Institute for International Economics, following eight years as a top economic adviser to President Obama. He served as the 28th Chairman of the Council of Economic Advisers from August 2013 to January 2017, acting as both President Obama’s chief economist and a member of the cabinet. He has authored several books, including Who Has the Cure?: Hamilton Project Ideas on Health Care (2008) and Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes (2008). His March 2019 report Unlocking Digital Competition is available to read here.