The New Economic Concentration
DAVID DAYEN JANUARY 16, 2019
The competition that justifies capitalism is being destroyed—by capitalists.
The Myth of Capitalism: Monopolies and the Death of Competition
By Jonathan Tepper with Denise Hearn
The Curse of Bigness: Antitrust in the New Gilded Age
By Tim Wu
Columbia Global Reports
This article appears in the Winter 2019 issue of The American Prospect magazine. Subscribe here.
Jonathan Tepper is not happy. You might call him angry. “People haven’t used the word anger before, but you’re probably correct,” he told me in a phone call.
The source of Tepper’s anger is capitalism; not the ideal laid out in textbooks, but how it’s been practiced since the 1980s. In a capitalist system, increased productivity and tight labor markets should lead to higher wages. But in the U.S., wages for the typical worker have been flat for four decades. In a capitalist system, “creative destruction” keeps the economy vibrant, as upstart companies push out less agile ones. But the rate of new business formation has been cut in half since the late 1970s. In a capitalist system, corporate profits should convert to increased investment. But while pre-tax profits keep growing, investment has lagged severely.
The tipping point for Tepper, a macroeconomic analyst for hedge funds and high net-worth individuals, was the release of Thomas Piketty’s Capital in the Twenty-First Century. The book was a powerhouse, but Tepper considered the premises off base. Meeting with friends at pubs in London where he lives, Tepper had to go to bat for capitalism. But he found it more and more difficult in the face of increasingly miserable evidence. Says Tepper, “The anger comes from having to defend a system that isn’t the system I’m defending. I got a little tired of it.”
Tepper, by background and temperament, should not be the one to drive a stake into the heart of capitalism. But he believes he knows the source of capitalism’s woes: concentrated corporate power, which has distorted markets, stagnated wages, sat on innovation and entrepreneurship, and engendered helplessness among the public. In The Myth of Capitalism, Tepper and his co-author Denise Hearn painstakingly detail how the U.S. economy is drowning in this sea of monopoly. And he reserves his greatest scorn for the regulators, lawyers, and economists who allowed it to happen.
Tim Wu, the Columbia law professor who coined the term “network neutrality,” has a much cooler setting in his thin volume, The Curse of Bigness. Yet these two treatises on monopoly play well together. Tepper paints the landscape of our concentrated economy; Wu is more concerned with how we got here, reaching back as far as the Boston Tea Party (a revolt against the liberty-depriving power of the East India Company monopoly) to show that America has a tradition of fighting concentration, for the betterment of all citizens.
Antitrust economists inexplicably comfort themselves with the belief that markets, under a technical measurement known as the Herfindahl-Hirschman Index, aren’t that consolidated. But the giveaway here is that that Federal Trade Commission stopped collecting data on industry concentration in 1981. The Open Markets Institute, an anti-monopoly think tank, filled in the blanks in November with a report showing how a handful of players dominate all sorts of commercial activity, from cradle to grave, baby formula (where four firms make 89 percent of the product) to coffins (two firms control 76 percent of the market). As Tepper puts it, with every transaction in your daily life, you pay a small toll to one monopoly or another.
“Capitalism without competition is not capitalism,” Tepper writes. Four airlines shuttle most Americans around the country. Two corporations brew most of the country’s beer. Three companies manage the lion’s share of pesticide and seed markets. Google and Apple host the entire mobile app market. You might think you have choices in the supermarket aisles, but a handful of companies produce all the varied brands. Every online travel booking site comes from one of two corporations.
This is made worse when monopolists cooperate to carve up the country; over 75 percent of all households have only one choice of internet provider. The concentration has spread to Wall Street, too. Tepper highlights Warren Buffett’s zeal for monopoly companies with economic “moats.” As investors copy Buffett’s strategies, they allow big firms to suck up available capital. The same big shareholders own large stakes in the main players in entire sectors, removing the incentive to compete. (In this sense, Tepper does mirror Piketty’s description of capital begetting capital, even if he would be uncomfortable with the comparison.)
If companies know they must create moats to attract investors, they will use political power to raise barriers to new entrants or acquire patent protections, building the walls ever higher. Failing that, they’ll just buy out the competition. Tepper notes that Google, Facebook, Amazon, Apple, and Microsoft have purchased 436 companies and startups in the past ten years, without a single regulatory challenge to any acquisition.
The effects of all this are profound. Tepper started the book to decipher the wage puzzle: Why did leading indicators keep pointing to higher wages that never came? He found that workers with fewer choices to deploy their talents—a condition known as monopsony—cannot bargain for better pay. As the benefits of economic growth pool in corporate boardrooms instead of workers’ pockets, inequality naturally follows.
Service quality suffers amid no alternatives to pressure monopolists. Fragility abounds in concentrated markets. Monoculture crops planted in the farm belt are susceptible to wipeout from one fungus or disease; Hurricane Maria’s devastation in Puerto Rico knocked out the manufacturing centers for the two companies that make nearly all intravenous saline solution bags for hospitals. That’s right—last year we had a serious shortage of something so elemental as salt and water in a bag, thanks to the brittle supply chain of a duopoly.
Where Tepper unfolds these nightmarish conditions, Wu offers a historical perspective. “From 1895 to 1904, at least 2,274 manufacturing firms merged,” Wu writes, recalling an era known as the Age of Trusts. Giants like Standard Oil and U.S. Steel, along with commodity trusts in tobacco, rubber, and cotton, were nearly impervious to rivals and swollen with profits. These robber barons actually argued that “ruinous competition” made prices too low and hurt markets.
Anger with monopolies in railroads had already birthed the Sherman Antitrust Act of 1890, with a mandate to decentralize power. But while it was passed to bust trusts, its language left enough room for interpretation that policymakers and courts, captured by dominant special interests, felt free to ignore it.
Wu identifies two heroes, who would eventually face off on opposite sides of the monopoly divide. Theodore Roosevelt, thrust into the presidency after William McKinley’s assassination, courageously took down J.P. Morgan’s Northern Securities railroad trust, just a couple of years after McKinley honored Morgan with a White House state dinner. Later, Roosevelt would initiate the case that dissolved Standard Oil. “When exaggerated wealth demands what is unfair,” he would later say, “its immense power can be met only by the still greater power of the people as a whole.”
But Roosevelt ends up an enigmatic figure to Wu. In 1912, disappointed by the performance of his handpicked successor William Howard Taft, Roosevelt created the Bull Moose Party, with a platform favoring “regulated monopolies” under state control. Roosevelt welcomed big business as long as government was its overlord. But standing in his way in 1912 was Woodrow Wilson, and his economic adviser Louis Brandeis, whose collected writings, called The Curse of Bigness, provided Wu with his book’s title.
Brandeis saw anti-monopoly laws like the Sherman Act as a check on private power and a necessary enabler of human freedom. In a democracy, Brandeis believed people should have “the right to live, and not merely to exist.” Both government and business forces can extinguish the liberty to pursue one’s own talents and interests. “Men are not free,” Brandeis wrote, “if dependent industrially on the arbitrary will of another.” Brandeis, and Wilson, won the argument and the presidency in 1912, and for 60 years, America worked to secure the blessings of liberty through competition.
And then came Robert Bork, and a revolution that ushered in our Second Gilded Age. Bork, best known for failing a Supreme Court nomination, was arguably more influential off the bench, rewriting the antitrust laws without changing a word in statute.
Today, mergers are scrutinized under Bork’s “consumer welfare” standard, which has come to mean simply whether the merger will result in lower prices. They typically don’t, as retrospective studies from Northeastern University Professor John Kwoka show. But the change moved monopoly off the field of politics and onto economics, where corporations could easily hire enough economists promising efficiency benefits from mergers to win any trial.
Tepper and Wu have plenty of recommendations to remedy our desiccated capitalism: enforcing antitrust laws, presumptively rejecting mergers that reduce competition to too few players, breaking up big companies and reversing mergers, reforming the consumer welfare standard, limiting patents, granting shares to workers, and ending the revolving door between big business and government.
But they really wish to re-energize the antitrust movement (its modern incarnation is sometimes called the New Brandeis movement). Americans, they say, have a preternatural resistance to bigness. Competition fits with Americans’ self-professed values of liberty and equality and opportunity. Modern capitalism snuffs out all of these values, handing society’s gains to too few hands.
I’m not necessarily as hopeful that anti-monopoly sentiments can be reawakened on a mass scale. Even if Americans prefer trust-busting, their preference intensity may not run as hot as those desiring the status quo. And the mass media that could deliver the facts of our concentrated economy are themselves massively concentrated. But if you want a concise, comprehensive understanding of today’s predicament—and how to fix it—these volumes are the perfect place to start. Maybe they will be remembered someday as the first stirrings of America reclaiming its democracy.