There is much to be concerned about in America today: a growing political and economic divide, slowing growth, decreasing life expectancy, an epidemic of diseases of despair. The unhappiness that is apparent has taken an ugly turn, with an increase in protectionism and nativism. Trump’s diagnosis, which blames outsiders, is wrong, as are the prescriptions that follow.
But we have to ask: Is there an underlying problem that can and must be addressed?
There is a widespread sense of powerlessness, both in our economic and political life. We seem no longer to control our own destinies. If we don’t like our Internet company or our cable TV, we either have no place to turn, or the alternative is no better. Monopoly corporations are the primary reason that drug prices in the United States are higher than anywhere else in the world. Whether we like it or not, a company like Equifax can gather data about us, and then blithely take insufficient cybersecurity measures, exposing half the country to the risk of identity fraud, and then charge us for but a partial restoration of the security that we had before a major breach.
Some century and a quarter ago, America was, in some ways, at a similar juncture: Political and economic power seemed concentrated in a few hands, in ways that were inconsonant with our democratic ideals. We passed the Sherman Anti-Trust Act in 1890, followed in the next quarter-century by other legislation trying to ensure competition in the market place. Importantly, these laws were based on the belief that concentrations of economic power inevitably would lead to concentrations in political power. Antitrust policy was not based on a finely honed economic analysis, resting on concurrent advances in economics. It was really about the nature of our society and democracy. But somehow, in the ensuing decades, antitrust was taken over by an army of economists and lawyers. They redefined and narrowed the scope, to focus on consumer harm, with strong presumptions that the market was in fact naturally competitive, placing the burden of proof on those who contended otherwise. On this basis, it became almost impossible to successfully bring a predatory pricing case: Any attempt to raise prices above costs would instantaneously be met by an onslaught of new firm entry (so it was claimed). Chicago economists would argue—with little backing in either theory or evidence—that one shouldn’t even worry about monopoly: In an innovative economy, monopoly power would only be temporary, and the ensuing contest to become the monopolist maximized innovation and consumer welfare.
Over the past four decades, economic theory and evidence has laid waste to such claims and the belief that some variant of the competitive equilibrium model provides a good, or even adequate, description of our economy.
But if we begin with the obvious, opposite hypothesis—that what we see in our daily life is true, that our economy is marked in industry after industry by large concentrations of market power—then we can begin to simultaneously understand much of what is going on. There has been an increase in the market power and concentration of a few firms in industry after industry, leading to an increase in prices relative to costs (in mark-ups). This lowers the standard of living every bit as much as it lowers workers’ wages. When I wrote The Price of Inequality five years ago, I attributed much of the increase in inequality to this redistribution from workers and ordinary savers to the owners of these oligopolies and monopolies. I explained the multiple sources of this increase in market power. Some of it might have been a natural result of the evolution of our economy, growth in industries with what economists call network externalities, which might lead to natural monopolies; some was the result of a shift in demand to local services, segments of the economy where local market power, based on differential information was more significant. But much of it was based on changing the implicit rules of the game—new antitrust standards that made the creation, abuse, and leveraging of market power easier—and the failure of antitrust standards to keep up with the changing evolution of the economy. That was why two years ago, the Roosevelt Institute called for Rewriting the Rules of the American Economy, and over the past two years has amplified this message, especially as it relates to market power.