Can Competition Cure Capitalism?

A new book proposes an old remedy for the US economy’s failure to deliver shared prosperity.

In the 1912 US presidential election, Woodrow Wilson ran on a promise ‘to overcome and destroy [the] far-reaching system of monopoly’ that had taken hold of American capitalism. The late 19th century had been an era of extreme economic concentration in America, in which a handful of famous families — the Rockefellers, Carnegies, Vanderbilts and Morgans — controlled whole industries.

Wilson professed to be on the side of the “little man”, but what he offered wasn’t state-sponsored social security. Unlike his opponent, Theodore Roosevelt, who pledged to introduce universal health care if elected, Wilson was no champion of welfarism. He believed, simply put, in free and fair competition. It was a popular enough message to win him the election.

More than a century on, we’re seeing something of a revival of Wilson’s brand of politics. And for good reason. Comparisons between the power of today’s tech giants and the power that was once wielded by Standard Oil, U.S. Steel and co are commonplace.

But, as Jonathan Tepper and Denise Hearn show in their recent book, The Myth of Capitalism, the oligopolisation of American capitalism is by no means confined to the tech sector.

Tepper and Hearn rattle off a disturbingly long list of industries that are today over-concentrated:

  • Two corporations control 90% of the beer Americans drink.
  • Four airlines completely dominate airline traffic, often enjoying local monopolies or duopolies in their regional hubs.
  • Many states have health insurance markets where the top two insurers have an 80–90% market share.
  • When it comes to high-speed internet access, almost all markets are local monopolies; over 75% of households have no choice beyond one local provider.
  • Four players control the entire US beef market and have carved up the country.
  • After two recent mergers, three companies control 70% of the world’s pesticide market and 80% of the US corn-seed market.

And that’s just the examples they cover in the introduction. ‘Competition,’ they conclude, ‘has not so much declined as thudded into the abyss,’ with disastrous consequences for the US economy and society: ‘higher prices, fewer startups, lower productivity, lower wages, higher income inequality, less investment, and the withering of American towns and smaller cities.’

So, to quote Lenin, what is to be done?

Enforcing existing legislation would be a good start. The legal basis for breaking up monopolies and disallowing mergers that undermine competition dates back to the Sherman Act of 1890, which was strengthened during Wilson’s first term with the passage of the Clayton Antitrust Act and the creation of the Federal Trade Commission (both in 1914).

The trouble is that, for most of the 100+ years that the US federal government has nominally had the power to tackle economic over-concentration, the law has been very weakly enforced. Theodore Roosevelt, though he fulminated against monopolists on the campaign trail, brought very few antitrust cases during his Presidency. Indeed, his entire Antitrust Division, Tepper and Hearn point out, was made up of just five lawyers.

FDR’s trust-buster-in-chief, Thurman Arnold

By the time Theodore’s distant cousin, Franklin D. Roosevelt, assumed the Presidency in 1933, the situation was little better: the Antitrust Division had added just ten more lawyers to its books in the intervening decades.

Change finally came with the appointment of a Yale Law Professor called Thurman Arnold to run the division in 1938. By the end of his tenure five years later, he had almost 600 lawyers working for him, and the division had brought almost as many antitrust cases as had been brought in the entire previous half century.

The anti-antitrust revolution

Strong antitrust enforcement persisted throughout the early postwar years under both Republican and Democratic Administrations, until the neoliberal turn of the 1970s and 1980s undid Arnold’s legacy. ‘Since Reagan, no president has enforced the spirit or the letter of the Sherman and Clayton Acts,’ conclude Tepper and Hearn.

They are highly critical of the Chicago School economists, who laid the intellectual foundations of the Reaganite, laissez-faire approach to government: ‘for the Chicago School, if it looks like a monopoly, walks like a monopoly and quacks like a monopoly, it is probably just your imagination.’

Neoliberal economic theory made the ills of over-concentration theoretically impossible; the facts be damned. Collusion and cartels couldn’t exist, they said, because there are too many incentives to cheat. If incumbents got bloated, new competitors would spring up to disrupt them because barriers to entry are a myth. And besides, corporate consolidation is — according to neoliberal doctrine — good for efficiency. Here’s Alan Greenspan, making the case for greater concentration in the early 1960s:

‘No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible.’

Greenspan was a peripheral figure at this point, though. The key protagonist in the revolution that undermined antitrust enforcement was Robert Bork, who, like Arnold before him, was a professor at Yale Law School. Bork’s contribution was to promulgate a new interpretation of antitrust law — still prevalent today — based on the idea that what really matters is “consumer welfare” (for which, read “low prices”).

The anti-anti-trust gang: Robert Bork with President Reagan

‘Under Bork,’ write Tepper and Hearn, ‘gone was any interest in keeping markets open to all new entrants, dispersing economic and political power, preventing collusion, and protecting small suppliers from predatory pricing. The only thing that mattered was price.’

The continuing dominance of Bork’s ideas has given the world’s most powerful companies a free pass: Facebook, Google and Amazon have all so far escaped serious scrutiny from antitrust enforcement agencies because the first two provide a “free” service and the third delivers rock-bottom prices.

Even on Bork’s terms, though, US antitrust enforcement has been woeful in recent decades. A major study by John Kwoka, a competition policy expert, published in 2014, found that, over the previous 20 years, 60% of all mergers that resulted in price increases went unchallenged by authorities. And there’s nothing particularly mysterious about why some mergers lead to price increases: Kwoka found that, in mergers that led to six or fewer significant competitors, prices rose in 95% of cases. Not a terribly difficult pattern to spot, you might think.

There are other ways, too, in which the most powerful firms twist laws and regulations to serve their interests. Intellectual property law is a well-known example. The number of US patents issued annually went from roughly 100,000 in the early 1980s to almost 600,000 by 2014. This is not because of an explosion in the number of Thomas Edisons in the population: it’s because big pharmaceutical and entertainment firms (among others) have used patent and copyright law to stifle competition.

Another example is the proliferation of non-compete clauses in workers’ contracts, notably in the fast-food sector. It is patently absurd to argue that someone flipping burgers at McDonald’s is privy to trade secrets that mean they should be prevented from defecting to Burger King. And yet, that is precisely the situation many fast-food sector workers find themselves in today.

There’s no good reason for these non-compete clauses. Their only function, according to Tepper and Hearn, is ‘to limit worker mobility and diminish their ability to bargain for wage increases. This is modern-day feudalism, and workers have become vassals to corporate lords.’

Competition in one country — and on one planet?

One question that Tepper and Hearn don’t address in their book is whether the threat of competition from firms in other countries has any bearing on the case for antitrust enforcement at home. This wasn’t an issue back in 1912, but it is frequently cited as a key factor by promoters of mergers and acquisitions today.

Proponents of a recent proposed merger between Siemens and Alstom, two large European rail operators, cited the threat of competition from Chinese companies as a key rationale for the need to create a European giant. Sainsbury’s and Asda, two large British supermarket chains, tried a similar argument, claiming consolidation was necessary to compete with the German discount retailers Lidl and Aldi. Better a home-grown monopoly than a foreign one, seems to be the logic.

But competition enforcement agencies aren’t buying it. Both deals have recently been rejected by the relevant authorities in the EU (in the Siemens-Alstom case) and the UK (in the Sainsbury’s-Asda case). The EU’s competition commissioner Margrethe Vestager made her view very clear in relation to the Siemens-Alstom case: “to become competitive abroad requires competition at home.”

The EU’s antitrust enforcer: Margrethe Vestager

Another topic that is largely absent from Tepper and Hearn’s book is how competition — or the lack thereof — affects the way that businesses treat the planet. It seems fairly clear-cut that restoring competition will help address social inequality by rebalancing the power dynamics between big companies on the one hand, and their customers, workers and would-be competitors on the other. But it’s by no means quite so clear that more competition will be good for the natural environment.

Competition creates downward pressure on profit margins, which is good news for workers and consumers, but not so good for those advocating greater corporate investment in clean technologies and energy efficiency programmes.

This isn’t an argument against stronger enforcement of antitrust laws, merely a reminder that competition is no cure-all: strong regulation and/or taxation will still be required to stop companies from externalising the costs of environmental protection and restoration. And whatever the reality of the relationship between competition and corporate investment in innovation, one thing is certain: if we do see a resurgence in antitrust enforcement, industry leaders will squeal that, with profit margins squeezed, they can’t afford to invest in initiatives that would reduce negative impacts.

So no, a dose of extra competition won’t entirely cure capitalism of its current malaise, but it should definitely be a central part of the prescription. The US doesn’t necessarily need a Woodrow Wilson in the White House, but it could certainly use a Thurman Arnold — or a Margrethe Vestager — to shake things up at the Federal Trade Commission.