For those of us who aren’t economists, do you want to start by explaining what you’ve chosen books about and what the economic theory behind it is?
All these books are about market concentration or market power, and the movement by governments and countries to control market power. Going back to Adam Smith, the argument of the model—as we call it in economics—is that there is an ideal situation or condition that we call ‘perfect competition.’ In perfect competition, there is a market defined by a particular product or service, let’s say grocery stores in a city. There is a theory and practice that says that if we have a lot of different suppliers of the service—so a lot of different supermarkets—and if we have what we call ‘open entry’ (at any moment in time, a new company could enter that market) then all of these companies constantly compete against each other, and can only charge a price for what they sell that gives a normal, fair compensation or profit for all the capital that they’re using. None of them can get powerful and dominant and you get low prices for the consumer.
The other extreme is what we call a monopoly, when there is only one provider. That company will try to maximize its profits and that means much higher prices. They will sell a lot less and hire fewer people. Then you have all the gradations in between: a duopoly, which is two, an oligopoly (from ancient Greek) is a few suppliers.
The argument is that the more producers and sellers we have, and the greater the potential for entry, the moment one company charges too much, a new one will come into the market and compete these profits away. That’s the best situation that we have.
“We have more of an information monopoly in America than the Chinese or the Russians”
Each of these companies has an incentive to try to build what we call a ‘moat,’ a barrier to entry that makes it harder for new ones to come in. Corporates do that by trying to influence the government to create laws—that you need to be registered, that you need to have a lot of capital or a license. You have all these regulations, a ton of things that maybe only the biggest companies can provide. There are all kinds of ways of reducing competition that protects companies, but not the market. We find many governments who say they’re ‘pro-business.’ Economists say, ‘No, no, no. That’s bad. Pro-market is good.’ The consumer doesn’t want to see a market where there are not a lot of choices.
We measure much of this by looking at what we call ‘concentration.’ A lot of discussions will be about how concentrated a market is. Typically, we look at the market share of the top four companies. Let’s say it’s at 65%. We have this with US airlines at the moment, they’ve all been merging a lot. It’s currently illegal for the leading companies in a market to have a price agreement—in the jargon we call it a ‘cartel’ because they’re colluding with each other to set prices. That’s criminal and you can go to jail for it. But there are indirect ways of doing it. If you only have a few companies, they can all look at each other, ‘We can’t really talk to each other but, implicitly, we’re keeping the prices high.’ There has been a lot of discussion of evidence that this is what’s happening in the US airline industry. It’s a heck of a lot more expensive to fly from Atlanta to New York than it is to fly from Brussels to Frankfurt, for example, where there’s more competition.
So that’s the economic concept and the jargon out of the way. These issues will keep coming back in each book as we talk about them.
Market concentration does seem to be one of the big challenges of the moment, but it’s slightly hidden from consumers because superficially it looks like we have a lot of choice. Can you give some examples?
Look at web browsers and search engines. How much choice do we have? The whole world uses Google. Look at searches for information: by now ‘to google’ is a verb in our language. More than 90% of all information searches in the world on the web are done by Google. Almost everything you do, nowadays, you google something. The running joke is, ‘how do we know whether Google has a lot of market power? Let’s google it.’ So Google has a lot of market power. We have more of an information monopoly in America than the Chinese or the Russians have in their country. It’s not a government, it’s one company.
Social media is pretty much Facebook, WhatsApp, and Instagram. These are not three different companies, they’re one company. The moment that WhatsApp became a competitor to Facebook, Facebook bought it. Same thing with Instagram.
Everything I use is Apple. My systems, my information, my documents. Everything is controlled by one company: it’s connected with my watch, my phone, my iPad and the MacBook Air we’re talking on. The whole family is on it: we have to be in order to share information. Apple controls our lives, and they can charge a massive profit margin for that—my phone costs $300 but they can charge me $1,200.
There’s the dominance of the tech giants and Amazon, but I was surprised at the extent to which consolidation has happened in traditional sectors as well. For example, most Americans buy their beer from just two companies.
The question is who is allowing it? This is where a lot of debate is. It used to be that if you wanted to acquire another company, in the United States you needed to put a notice in with the Department of Justice or the Federal Trade Commission (FTC). They would review it and say, ‘Wait a minute, if you buy this, then the top four companies will have 50% of the market! This is not allowed.’
The reason that a lot of these books have appeared is that the original idea was that market concentration by itself is bad. Then the Chicago school of economics came along and argued, ‘No, the reason we have market concentration and companies grow big is because they’re good to consumers. They’re selling the right stuff, let them sell and only punish them if they start doing bad stuff.’ There are a number of things that are considered bad—having price agreements or engaging in ‘predatory pricing’, which is trying to eliminate a competitor by selling below cost. Since then, the ‘anti-government, let capitalism reign’ that started in the late 70s has led increasingly to an antitrust policy of ‘let it happen,’ not just in Republican administrations but also in Democrat ones. They allowed Facebook to acquire WhatsApp, arguing they’re not in the same market because WhatsApp doesn’t do advertising and Facebook doesn’t do messaging!
“The running joke is, ‘how do we know whether Google has a lot of market power? Let’s google it.’”
This is why we now have what I call ‘the great correlation.’ In the last two to three decades, a number of things have happened, all at the same time. We’re seeing dramatic increases in wealth and income inequality. We’re seeing corporate profit, as a share of total national income, doubling. We’re seeing huge increases in market concentration. We’re seeing the real wages of the middle class stagnating. Have you heard about the book, Deaths of Despair? It was a potential one of my five books. It’s arguing that in America the white, less educated people, mostly male, are going through a decline in life expectancy due to drugs, alcohol, opioids and suicide. A lot of it is to do with the falling apart of the traditional family structure. People don’t have proper jobs anymore; all those jobs have moved away.
So we have income inequality, low wages, and worsening US life expectancy as well as low economic growth, low capital spending, low interest rates and a massive, never-seen-before rally in the equity market. Equities are a pricing of corporate profits: if companies make more profits, stock markets go up. If the economy grows a little and profits go up a lot, with that comes a dramatic increase in business concentration. Large companies are getting bigger, the birth rate (as we call it) of new companies is falling. So the creation of new companies is falling and the death rate of old companies, the zombies, is falling too; the average age of companies is increasing. Overall, economic dynamism is falling, and productivity growth is falling too. Everything is correlated.
The question is, which one is causing which? More Democratic, left-wing oriented economists are all saying it is due to a massive monopolization of the economy. What is causing that? Thomas Philippon, the author of one of the books I’ve chosen, has been arguing that the really crucial factor that changes in the US and not so much in Europe is the role of money in financing politicians. It’s about the relaxing of rules on financing electoral campaigns, including the decision in 2010 to allow a corporate to be considered a person under the US Constitution. If you are an honest person who wants to do right for the country as a politician, you can’t survive because you won’t get any money from corporates, and you need that money to get re-elected.
To understand this in more detail, you’ve chosen a fabulous selection of books. Broadly, we’re talking about how to approach what I usually call ‘antitrust’, but we have to look at US history to understand why we use that word. Why don’t we start by talking about The Hour of Fate: Theodore Roosevelt, J.P. Morgan, and the Battle to Transform American Capitalism, which looks at the events of just over a century ago. It’s by Susan Berfield, a journalist, so it’s very, very readable, and starts with the assassination of William McKinley. Tell me more.
The word ‘antitrust’ comes from the late 1800s. The trusts were companies that got together to create holding companies. They acted together. The banker who organized a lot of these trusts was called John Pierpont Morgan. Morgan hated chaos and disorder, and a dynamic, capitalist economy is extremely chaotic. This was the beginning of the railroads, and everybody was setting up railroads. You might have two cities with three or four different railroads going between them. They were all competing, and nobody was making any money. But you don’t need four railroads, you just need one. J.P. Morgan merged a lot of the railroads but why stop at that? He also created US Steel as a merger of all the steel companies. Carnegie and Mellon got involved in that too. Meanwhile, Rockefeller merged the oil companies: at one point he controlled 90% of oil in America. J.P. Morgan created larger and larger holding companies. He was trying to monopolize; he was trying to make money for his shareholders. You may have heard of Warren Buffett, who is known around the world because he has been so good at selecting companies to invest in. He dislikes competitive markets because they don’t make a lot of money. He’s very explicit about it: he wants companies that have a strong moat around them. Then they can really be profitable.
Now, there is market power relative to the buyer of the goods, but there’s also market power with respect to people who work for you or labor. The trusts exploited labor. The tenements, the horrible social conditions, you can read all about that in the book by Susan Berfield. The people working in the coal mines were treated horribly. They were working 12 hours a day, six days a week, there was child labor, horrible accidents taking place. Whatever money they made, they frequently had to spend at the company store, and got ripped off again. These terrible conditions really started to get noticed by people. Who was doing this? It was the trusts who were doing it.
So one of the points to make is that we don’t really have these horrible social conditions at the moment. We’re all dependent on the big tech companies. They control my information, they use it, and it’s going all over the place. But there’s not enough anger at them yet. There’s a bit of anger at Facebook. The Republicans say they’re a bunch of liberals and are always lying about poor Mr. Trump. The Democrats are saying that Facebook brought Trump in by having the Russians troll and provide misinformation about poor Hillary Clinton. So there’s a bit of anger at big tech, but it’s more by politicians than people on the ground.
But people do see things. Tim Cook at Apple got paid $600 million a couple of years ago. The numbers are out there. While we can barely afford groceries, couldn’t he do the job for $60 million, or for $6 million? The Trump vote is a recognition that there is anger out there. It’s not that easy for people to say where it’s coming from, but there is a general principle that people do recognize: if things go wrong, it is people with the most power and the most money at whose desk the dollar stops. They must be responsible because they’re benefiting from it. It’s either the government who’s responsible, but who really has power in this country? It’s the big corporates, the big banks. They are responsible for this. They’ll say, ‘It’s not my fault’ but they’re benefiting the most from the system.
And what a lot of these books, these economists, are arguing is that it is their fault. Maybe not intentionally, maybe Amazon is a good company that provides these fantastic services. But at some point, power corrupts. That shows up in every book about reality. You’re the good guy, you provide this fantastic service, but you become bigger and bigger and bigger and suddenly you can do what you want. Then you start becoming abusive. The way that Amazon, for example, is trying very hard to prevent unionization of its warehouses. Now, finally, we have a union in Staten Island in New York, the first one to get there, even as the second drive failed. People are seeing Amazon as a bit of an enemy of labor, even though we depend upon it.
So Susan Berfield’s book highlights the importance of popular anger about what large corporations are doing. At the moment, large corporations are aware of that. There is a movement that started about two years ago, with large American corporates pledging that the purpose of a company is not purely to maximize profits, but to support all stakeholders: customers, workers, suppliers, the community. With power comes responsibility and if companies do not take responsibility—if we’re not seen to be part of the solution on income inequality, on growth, on climate—we’ll be seen as the reason all that is going wrong. So that is a lesson that companies today are learning.
Teddy Roosevelt did not go out and say, ‘I’m going to be cutting back on these companies.’ But he recognized that’s where the power was, and that the big corporates were purely trying to maximize their profits. J.P. Morgan and Rockefeller were the face of that. Without that ugly face of capitalism of large companies, we might not have seen that big antitrust movement.
Let’s move on to The Curse of Bigness by Tim Wu. This is short and sharp, a great introduction to the subject, and probably the best place to start if you haven’t read about market power before.
Tim Wu is an advisor to Joe Biden on antitrust. The book’s title refers to a book with the same title by Louis Brandeis (1846-1941), the Supreme Court judge who was very instrumental in applying antitrust. Tim’s book brings up what Amy Klobuchar also does (I’ll talk about her book in a minute), that there are two arguments for fighting corporate bigness: one of them is economic, the other is political. The Chicago school never went into the political: they were focused on economics.
The economics part is about the exploitation of labor, exploitation of the consumer, excessive pricing. The political part is about an imbalance of power. So in a democratic country, we elect people to make collective decisions for us, they go to Congress, and the system of government was founded—under the typical democratic and liberal system—as a balance of power between the executive, the judiciary, and the legislative. Tim Wu’s argument is that the Founding Fathers, in the 1700s, could not expect that a fourth power would emerge. The Constitution did not do anything to control corporations because there were none to speak of at the time (with the exception of the East India Company, which comes up in Amy Klobuchar’s book). Then, in the late 1800s, the same thing happened as is happening in China now: the government recognized that corporate power is not just bad for labor but for who is running the country as well.
A century ago, Americans were saying, ‘Teddy Roosevelt doesn’t run the country, J.P. Morgan does.’ When Teddy Roosevelt needed to end the coal strike for the sake of the country and he could not get the new coal workers’ union and the coal companies to agree, what did he do? He made a call to J.P. Morgan. It was J.P. Morgan who said, ‘Okay, we’re all going to go into some form of arbitration.’ In 1907, there was a financial crisis, and the US government ran out of gold. Who organized the funding? J.P. Morgan. At that point, everyone knew who was running the country, but nobody had voted for him.
So the whole political movement against antitrust is around the idea that we, in a democratic society, want power to be balanced, and controlled by the people. The corporates have all this power now, and at some point, they’re going to do bad things with that. That’s the point Tim starts with.
Then he brings in two new ideas. Historians can debate whether he’s right. He argues that corporate concentration ultimately leads to an equivalent on the government side, which is fascism. In Germany before World War II, there was massive corporate concentration, much more than in any other country. Big corporates needed a well-organized country, not the chaos of the Weimer Republic and hyperinflation. They needed a partner and that was Hitler. The same thing happened in Italy and Japan. Corporates have massive power, and they want the same power concentration in the government. Effectively, he says, corporate concentration leads to the destruction of democracy and he’s afraid that the same thing will happen in the US. America did not have fascism before because we had antitrust, but at some point, Apple and Google will say, ‘Look at this stupid democracy, we need somebody to run the country properly.’
The second idea, which I thought was very interesting, is about why these big tech companies emerged in America. Europeans and Japanese may have much better engineers than Americans do, how come they didn’t create big tech? Tim’s argument is that one of the last big acts of antitrust was to break up AT&T, which was a telephone monopoly. The UK didn’t do that, you still had BT. All the big European countries had their national telephone monopolies. Japan never really deregulated either.
All the original internet technology needed to go via telephone lines. Starting in the 1990s, it was the open access in the US that allowed the big technology companies to grow. Ultimately, allowing open competition leads to innovation and productivity.
It’s a very nice example of what the long-term impact is. You might say initially, ‘Oh Amazon is very competitive here.’ But if you give it a monopoly, at some point, its real objective is to prevent anybody else from entering the market. In the process, they destroy competition. That really made me think.
Tim Wu also makes the familiar arguments about concentration and income inequality, populism and consumer prices. Internet access in the US is two, three times the price it is in France. Airlines, pharmaceutical products: with so many of these products where you have a concentration of power, you’re paying one heck of a lot more in America than you pay in Europe.
I loved his opening chapter about the Brazilian slaughterhouse that took over the world. That was an incredible story, which I didn’t know. He’s a good storyteller.
Yes. I was virtually at a conference a couple of months ago in Brussels, by Charles River Associates. They have antitrust economists and they brought in Tim Wu and Lina Khan, who is chair of the FTC and Jonathan Kantor, who is head of the Department of Justice’s antitrust division. Jan Eeckhout was there too. All these people I’m talking about were all there in person. It was quite amazing to see them. They speak quite well.
Let’s go on to your third book, which you’re already referred to in passing. This is Antitrust: Taking on Monopoly Power from the Gilded Age to the Digital Age and it’s by Amy Klobuchar, who is a Senator for Minnesota. She seems to be pretty determined to deal with these issues and focused on antitrust. Tell me a bit about that book.
Yes, she’s not an economist or a philosopher, but a politician. She ran for the nomination for president for the Democratic Party but didn’t make it. She’s from Minnesota, and the book really speaks of her and how she grew up over there. Americans are generally all immigrants or children of immigrants from other countries. They distrust government and big corporates, these huge faceless companies. She loves small companies where people know each other, where customers know each other. She speaks for that love for a world where nobody really has a lot of power over other people. We’re all at the same level, in a democratic system.
She completely disagrees with the Chicago school that if companies produce fantastic products, you can let them grow big. She argues, like others, that what is fundamentally needed in a democratic system is a balance of power. When companies get too big, they become too powerful and they mistreat the customer, they mistreat their labor, they mistreat their communities. She says we simply need to reapply antitrust law again (she’s originally a lawyer, as is her husband).
It’s a political statement. She says we need antitrust to rectify the imbalance between the rich and those of more modest income. She is angry about the power of money in corporate lobbying in Washington. She says we need to break up the big tech companies, to have divestments.
There’s a big brouhaha at the moment about non-compete clauses: if you’re hired by a company, particularly in big tech, your contract typically says you can’t work for a company that competes with it for a number of years. You’re locked into that company, which gives the company a lot of power over you. She says that should not really be allowed.
She argues against cross-ownership. She points out that the Vanguards and BlackRocks of this world are massive: they own shares in all companies. She argues that because Vanguard owns shares in every company that forces companies to work together rather than to compete against each other. She says that as an equity manager, it’s in your interest that these companies maximize their profits, rather than competing these profits away. I don’t think there’s any evidence of that, though.
The book starts with a horrible story of a drug for newborn babies being sold for a hugely inflated price. It was very clearly a situation where antitrust law had a role to play but was unable to prevent price gouging.
In America, we have concentration first in tech, then in the healthcare industry, then in banking, depending on how you measure it. Everybody talks about tech and pharma and the abusive pricing of pharmaceutical products. In Europe, there are price controls. It’s not that we have a lot of competition in Europe, it’s simply that the prices of pharmaceutical products are controlled. In the US they aren’t, and we have this horrible situation of prices going up by 2,000%. The healthcare industry has a lot of market power.
Let’s go on to The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon. He’s a French economist who’s teaching in the US and he’s comparing America to Europe as he tells the story.
Yes, very explicitly. He gives you all the metrics of corporate concentration and asks why it’s happening. As I mentioned, in economics there are two schools of thought. There is the Chicago school, call it the right wing, if you want. They see large companies as ‘superstar’ companies, who have more and more new technologies and can take advantage of economies of scale that allow them to lower their unit costs as they get bigger. In microeconomic theory, if your costs are mostly fixed, then the more you sell, the more you can spread these costs out and the lower your price.
In technology, this becomes what we call the network effect. So the value of Facebook is proportional to the number of people who are on Facebook. If it’s 100 million, that’s great. If it’s a billion, it’s even better. It becomes what we call ‘a natural monopoly’ in that the optimal economic situation is where there’s only one, because then you can lower your costs massively. In technology, we have more and more of these fixed costs and these network effects, which makes it natural that these companies get bigger and bigger, and more and more concentrated. But with that comes market power. In turn, these companies will then spend money to create barriers to entry, to pass all kinds of laws to make it difficult for other companies to enter.
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Thomas Philippon asks, ‘What is the big difference between Europe and US?’ In the US antitrust is a political process. It’s about campaign financing laws. Apparently 70% of the time someone spends in the House or the Senate is involved in raising money! 20 years ago, the financing of electoral campaigns was changed to allow more corporate money to finance politicians. All these big corporate lobbyists are saying, ‘Here’s a big check for your election campaign, I need this and this.’ And if you don’t do that, you have no money and you don’t get reelected.
In Europe, a lot of the antitrust regulations come from the European Commission, who are not elected politicians, but bureaucrats. That was part of the issue with Brexit. They are not representing the people, they’re appointed. But, as a result, they can’t be bought. There’s no election campaign for them. So, in Europe, the competition department is run by Margrethe Vestager, who is Danish. She cannot be bought so she is going to make sure that we don’t have excessive corporate power and concentration and abusive pricing. That’s why we have more competitive markets in Europe than we have in the US. That’s Thomas Philippon’s main insight.
Does anywhere else in the world have a good competition authority?
Every European country has one. The UK has one, in Germany it’s called the Bundeskartellamt. One country where it is extremely powerful and effective is China. China has had its own Anti-Monopoly Law only since 2007, but last year strengthened it to deal with tech companies. It’s not really a question of pricing or economics, it’s about political power. You have the Chinese Communist Party, and you have the corporates. The Communist Party is saying, ‘We’re in charge, not you.’ They’re recognizing that they have to do this, and I can’t disagree with them.
Finally, you’ve chosen The Profit Paradox by economist Jan Eeckhout, which focuses on the impact of market concentration on the labour market and wages. This is another very, very interesting book.
Yes, he’s showing the impact of all this and how it leads to inequality. It used to be that the biggest inequality was within companies, the CEO versus workers. That’s no longer the case, it’s now between companies. There are high-wage, very effective companies who are outsourcing all their lower-wage jobs. So now you have low-wage companies, and you have high-wage companies; there is job polarization, and the middle class has disappeared. Eeckhout says it’s all about market power, but there’s also globalization, which is a different force. It’s amplifying the impact of market power and big concentration and it’s hard to disentangle. Is it globalization that pushed all the middle-class jobs to China? Or is it the massive corporate power of Apple that says, ‘OK, let’s get all these jobs out of here’? It’s both.
He talks about the difference between big cities. It used to be that compensation across cities wasn’t really that different. Now, where the big concentrations are in New York and San Francisco you have massive increases in wages versus other cities where this is not the case.
He’s talking about the increase in non-compete contracts, of licensing as a way of keeping other companies or potential entrants out. He really thinks that the patent system is no longer working, that it’s being used to keep other companies out.
He talks about the fall in job mobility. These big monopolies don’t necessarily all want to grow, they just want to keep their profits where they are. People used to switch jobs a lot more than they do today. He sees that as part of the lower dynamic business mobility because companies don’t go come and go anymore. They don’t die as much. He is talking about how the brunt of all this change falls on the elderly. Technology changes, market power, he sees it all as one thing. He then links it up with the Deaths of Despair that we talked about by Anne Case and Angus Deaton. The low wage growth, the worsening of health.
“The economy and the equity market ain’t the same thing”
As to the solution, that’s where it gets a little bit weaker. He wants a third way. He recognizes that these big corporates like Amazon and Google have created millions of jobs. So they are helping the economy overall. The question is, can you keep the good stuff without having the bad stuff, which is that market power ultimately corrupts? He’s a bit waffling there on exactly how you do it. He says he’s neither with the Chicago school nor the Harvard school, which is the Tim Wu, Louis Brandeis approach. He says bigness by itself should not be a sin. Big companies are there because they provide good stuff.
But ultimately, excessive power has a negative impact on society, and we need to control that. In technology, he talks about ‘interoperability’, which is a hot topic at the moment. A typical example is Apple. It has its app store. You need to pay Apple for that and Apple will decide who’s on and who’s not. So opening that up a bit as we did many years ago when Microsoft said, ‘you can only use our browser.’ Then the antitrust authority said, ‘No, you have to allow everybody’s browser to be on there.’ That massively reduced the monopoly power of Microsoft. So we need to do the same thing with Apple.
I heard him speak at a conference a few months ago. He said, ‘We have an inflation problem in America and we have a monetary policy to deal with that, with 3000 or 4000 economists working at the Federal Reserve. We have a much bigger problem with corporate concentration, but how many people work at the antitrust division? A fraction of that. We need more proper resources for antitrust, and FTC.’ Amy Klobuchar also has several proposals at the moment in the Senate. One of the big provisions is to provide more resources for the antitrust division. Biden is trying to do that also.
My main criticism of the book is that he has one little tool, market power, and he uses it to explain everything in the world. There is not always a correlation there.
Now people are focusing on this, are you optimistic about the future?
I’m not optimistic. Corporate power is too strong, and the power of money is there. The judges are also going be preventing a lot of this because we have not applied antitrust for 30 years. The US uses a precedent system similar to the UK and there is now a broad legal precedent of allowing these things to happen.
What’s the impact on markets?
The US equity market has been the strongest equity market in the world for the last 15 years because of a doubling of profit margins. The moment antitrust comes back, if it comes back, we will see our equity market do what China’s did, which is crash because then the profits will go away. So antitrust is a big threat to our equity market but it’s good for the economy and the country in the long term. The economy and the equity market ain’t the same thing. China is not managing its economy for the benefit of shareholders, it’s managing it for the benefit of everyone in China. That’s why China is doing better than we are at the moment.
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