The Very Best of “Radical Markets”

Dear readers,

Here is the second article in our series “The Very Best Of” following a first installment about The Antitrust Religion (link). As a quick reminder, this new series aims at taking the “best” extracts from books dealing with competition law so to present them in the words of the author. Written by Eric A. Posner & E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society was recently published by Princeton University Press (2018). Engaging and provocative, it forces us to rethink numerous assertions we took for granted, in the manner of Descartes: “If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things“. Although I don’t agree with all the ideas put forward, here are the extracts I enjoyed the most dealing with antitrust law.

Thibault Schrepel


(Chapter 1 & 4)

Ludwig von Mises and Friedrich Hayek, who were students of the third marginal revolutionary, Carl Menger, pointed out the flaw in central planning: those who undertake it lack the information and analytical capacity to make the best allocative decisions. People’s valuations are private information; the genius of the market is its capacity for disseminating this information from consumers to producers through the price system. Central planning, in contrast, results in massive misallocation of resources—the production of goods no one wanted—that was characteristic of real-world socialist economies like that of the Soviet Union. Moreover, centralization of the economy opened the way to political abuse, which Hayek memorably called the “road to serfdom.” Reacting to these horrors of central planning, Western liberals concluded that capitalism, whatever its limitations, was the superior method of economic organization. The best approach to monopoly was antitrust law, regulation, and limited state ownership in the most important industries. In the United States, the government subjected “natural monopolies” like electricity to price regulation, and in Europe, major utilities and other large companies were often owned by the government. Amid the postwar economic boom, the fundamental problems with private property faded from view.

{In fact}, the word “monopoly” was coined by Aristotle in a discussion of the mathematician and philosopher Thales of Miletus, who showed the value of philosophy in practical affairs by cornering the market on olive presses ahead of a harvest. Yet during the early modern era, the major source of monopoly was not this type of individual initiative, but the state, which authorized well-connected individuals or groups to dominate various lines of business. Adam Smith and his contemporaries saw these legal arrangements as the primary source of monopoly. The movement for American Independence was partly a struggle against the monopolistic control of the British East India Company over the trade in tea.

{Later}, American antitrust law became a model internationally: it spread first to Britain and then to the European continent and farther around the world. Yet just as American authorities gained the admiration of the world, they stepped off the Red Queen’s treadmill. Beginning in the 1970s and accelerating from the 1980s onward, antitrust authorities lost track of the ways in which capital markets reconfigured themselves to maintain monopoly power.

Restoring Competition: institutional investors
(Chapter 4)

A simple but Radical reform can prevent this dystopia {high prices and lower wages}: ban institutional investors from diversifying their holdings within industries while allowing them to diversify across industries. BlackRock would own as much as it wants of (say) United Airlines, but it would own no stake in Delta, Southwest, and the others. It would also own as much as it wants of Pepsi, but not Coca-Cola and Dr. Pepper. And it would own as much as it wants of JP Morgan, but none of Citigroup and the other banks. If BlackRock remains large, it would likely end up with very large stakes in the firms it owns—10–20%, or more—in various markets.

We would also allow institutional investors to remain diversified within, as well as across, industries as long as they did not grow too large. Based on more detailed calculations in our joint work on this proposal with Fiona Scott Morton (former chief economist of the Antitrust Division of the DOJ), we think 1% is a reasonable threshold. Thus, an institutional investor could own 1% of United, 1% of Delta, 1% of Southwest, and 1% of all the other airlines; and 1% each of Pepsi, Coca-Cola, and Dr. Pepper; and 1% of all the banks; and so on. Under our scheme, institutional investors face a tradeoff. They can be small and fully diversified—within as well as across industries. Or they can be large and partially diversified—not within but only across industries. We also exempt investors that opt to be purely passive (that do not engage in any corporate governance activities). Our approach can be stated as a simple rule:

No investor holding shares of more than a single effective firm in an oligopoly and participating in corporate governance may own more than 1% of the market. 

The actual operationalization of this rule is subtle (e.g., how to define “oligopoly” and an “effective firm”). Questions concern how to address firms that operate in multiple markets, among many others. Readers who are interested in the details may consult our companion study. For current purposes, however, the rule should be clear. By now, the justification for our policy should also be clear. Because institutional investors appear to reduce competition among firms they own, they should not be permitted to own firms that are rivals within a single, concentrated industry—with exceptions where institutional investors are small or passive.

{And in fact}, Section 7 has been used to block numerous mergers and other asset acquisitions over the years. It has not been used against institutional investors. Yet as the legal scholar Elhauge notes, the legal argument for applying Section 7 to institutional investors seems clear. As in the case of merger-related antitrust enforcement, the plaintiff need not prove that the defendant “intended” to reduce competition; effects are what matter. Moreover, the so-called passive investment defense in the statute does not apply to institutional investors because, regardless of how they choose stocks, they vote and communicate with corporations in an effort to influence their behavior, and are likely to be liable even if they only have the capacity to influence a corporation, whether or not they use it. Regulators and private antitrust plaintiffs could sue the institutional investors whenever investors’ stock purchases tend to lessen competition in particular industries.

If institutional investors are found to have violated the Clayton Act, they would be potentially subject to treble damages, owing three times the harm they have caused to consumers and workers. Our calculations suggest these harms total at least $100 billion annually, implying damages could easily run into the trillions of dollars, sums that would wipe out the entire industry. Yet directly and indiscriminately pursuing such litigation seems an unpromising strategy for addressing the power of institutional investors for several reasons.

The most promising path is for the antitrust enforcement agencies to threaten broad enforcement actions, but to offer a safe harbor to any institutional investor that comes into compliance with our rule. This would use existing institutions to enforce this new rule, creating a predictable business environment. Such safe harbors are a standard tool of antitrust policy used in a variety of areas at present to provide guidance to firms as they choose their business strategies. (…)

Gains from breaking the power of institutional investors could be as much as 0.5% of national income, accounting only for effects on product markets. Effects on labor markets are likely of the same magnitude, and those on politics (while far less certain) should not be smaller. This would increase the gains we calculate to 1.5%. Our other antitrust proposals below, while each individually narrower, should in total account for at least a third of this and thus raise the total value to 2% of national income. Effects on inequality should be similarly large. Extrapolating from our previous analysis beyond narrow product market effects in the same manner, our proposal would transfer about 2% of national income from the owners of capital to the broader public, thereby reducing the share of income captured by the top 1% by a percentage point. This would go an eighth of the way to restoring the income shares of the top 1% that prevailed in the 1970s.

{And lastly}, we also noted that large firms pose a problem of monopsony as well with respect to workers. Monopsony was a central feature of the industrial era, when the growth of industries allowed robber barons to artificially hold down the wages of workers who could not find good jobs outside of the industry they specialized in. Growing economic evidence suggests that monopsony is at least as great a problem as the monopoly power on which antitrust enforcement usually focuses. Starting in the Progressive era and culminating with the New Deal, the government introduced laws to support labor unions and protect workers from being overworked, underpaid, and subject to inadequate safety conditions in the workplace. These institutions played a crucial role, especially in industries that are natural monopsonies (where trying to avoid monopsony would do more harm than good). However, many industries with monopsony power are not natural monopsonies, and antitrust has a powerful role to play in preventing monopsony from establishing itself in the first place.

Digital sectors
(Chapter 4 & conclusion)

Another growing area where antitrust goes underenforced is the digital economy. Competition there often happens through the sort of “disruption” highlighted by business scholar Clayton Christensen in his 1997 classic The Innovator’s Dilemma, where entry by a new firm or product changes the nature of the market rather than produces a better or cheaper version of an existing product. For example, Facebook is currently probably the most important competitor of Google (for user attention and advertiser dollars), but began in a completely unrelated business (of social networking as opposed to search functions). Antitrust authorities, who are accustomed to worrying about competition within existing, well-defined, and easily measurable markets, have allowed most mergers between dominant tech firms and younger potential disrupters to proceed. Google was allowed to buy mapping start-up Waze and artificial intelligence powerhouse Deep Mind; Facebook to buy Instagram and WhatsApp; and Microsoft to buy Skype and LinkedIn.

While such acquisitions doubtless help accelerate a path to market for start-up products and provide badly needed financing, they also have a dark side. Economist Luís Cabral has named these mergers “Standing on the Shoulders of Dwarfs”: they may crush the possibility of new firms emerging to challenge the business model of existing industry leaders, instead co-opting them to cement the dominance of those leaders. To prevent this dampening of innovation and competition, antitrust authorities must learn to think more like entrepreneurs and venture capitalists, seeing possibilities beyond existing market structures to the potential markets and technologies of the future, even if these are highly uncertain.

A final and more fraught area in which we believe antitrust has a role to play is preventing the excessive concentration of political power. Fears about the political influence of large firms were a central motivation for the original antitrust laws. Economist Luigi Zingales makes a forceful case in his 2012 book, A Capitalism for the People, that antitrust law should be used to block mergers that result in the acquisition of political influence through the concentration of lobbying capacity in a few firms.

Given the often discretionary nature of antitrust enforcement, there is a danger that such authority could be used selectively to attack rivals of the current party in power. We would only favor adoption of such a remit of authority once objective standards for judging the risk of excess political influence develop similar to those underlying existing merger guidelines. Nonetheless, this is an area that merits more research and regulatory attention than it has received in recent years.

Markets without competition are not markets at all, just as a one-party state cannot be a democracy. Because investors earn the highest returns by creating monopolies, markets are constantly in danger of becoming concentrated, and only the government can stand in the way. This chapter has focused on the most important such form of concentration of our era—the rise of the institutional investor. Our Radical approach, in the spirit of the Progressive economists, is to put a hard ceiling on the holdings of those investors. If our approach is followed, it will not only transform capital markets and generate a great deal of wealth, but also lead to greater prosperity for the least well-off. Yet we have also admitted that new forms of market concentration will predictably arise. To misquote another Radical, eternal vigilance is the price of market competition.

Our proposal on antitrust would also have important political effects that would help smooth the way for our more ambitious reforms. Money or “capital” can damage politics in many ways beyond the usual concerns about corruption and campaign contributions. When an industry is highly concentrated, it can present a united front to regulators and thwart reformers. During the Gilded Age, monopolies interfered with politics in many ways; indeed, the Sherman Antitrust Act, and the reforms undertaken by the Progressives, were motivated as much by the political dangers posed by monopolies as their economic costs. In the middle part of the twentieth century, lobbyists for different firms in an industry in the United States would often be at one another’s throats, each fighting for advantage and often canceling out the efforts of the others. But by the late 1970s, businesses had consolidated their influence and worked in concert to lower taxes, reduce regulations that constrained their profits, and increase regulations that protected them from competition. This consolidated influence allowed these interests to more effectively influence policy and helped shut out consumer groups.

The resulting loss of morale damages politics in the same way that concentrated economic power can harm the economy. Our antitrust proposal, by weakening the power of concentrated capital, should help cure the sense of political helplessness that has contributed to the stagnation of the public sphere and clear away the outsized influence of capital that is likely to be the strongest impediment to the success of our more radical proposals.

After Markets and AI

Our proposals on antitrust and data valuation break up centralized power and place greater responsibility on individuals and small firms to compete, innovate, and make rational economic choices to allow for the distributed computation of optimal economic allocations. But all these proposals raise the question: if the market is just a computer program that harnesses the power of individual human intellects, will it still be necessary as computer power increases?

In a response to Hayek, Lange said, “Let us put the simultaneous equations (governing the market) on an electronic computer and we shall obtain the solution in less than a second.” The seed of truth in this claim had been identified just six months before Lange’s death in 1965 by technology entrepreneur Gordon Moore.

Moore observed that the density of microchips and the computing power that could be achieved for a given cost doubled roughly every eighteen months. While this “Moore’s Law” was a wild extrapolation rather than a well-founded principle, it has largely held up. Because of this rapid development of computational capacity, the dream of a computer network that can achieve the complexity of the human mind is no longer out of reach. Most engineers believe that in the near future, probably the 2050s, the total capacity of digital computers will exceed that of all human minds.

When this point has been reached, the computational critique aimed at Lange will no longer hold. In principle, the market could be replicated in silicon—replacing the distributed, parallel flesh-and-blood system that we are familiar with. The computers would tell people what to produce—distributing rewards and meting out sanctions as necessary—and distribute to people whatever they should consume. The technological problem in aggregating information can be solved. The public attention currently given to the rise of robots—as workers, servants, and lovers—has focused overwhelmingly on the micro level, the human-to-computer interactions that could result in physical or emotional harm. But if robots can drive cars, they can also make purchase orders, accept deliveries, gauge consumer sentiment, plan economic operations, and coordinate this activity at the level of the economy. At this macro level, the role of artificial intelligence in reshaping social organization has—bizarrely—received little attention. Whether such a system would work as intended, or its centralized authority be horribly abused, is of far more significance than the hot topic of whether a robot driver should be programmed to sacrifice a single passenger to save two pedestrians.

Meanwhile, behind-the-scenes information technology plays an increasing role in business planning. While our economy remains primarily driven by the interplay of markets, an increasing number of businesses organize logistics, production schedules, distribution channels, and supply chains in automated ways. These vast, successful corporations engage in the type of technical calculations that Lange envisioned for the central planner, albeit at a smaller scale. Walmart grew to be one of the most valuable enterprises in the world through its mastery of automated logistics and pricing, and yet is quickly being outstripped by the even further automated and centralized planning of Amazon. Uber directs a large part of the flow of transportation services in many cities. In short, vast corporations—islands of centralized planning in the ocean of the market economy—produce a significant amount of economic value by exploiting computational power. (…) While we leave such speculation to the writers of science fiction, we remain confident that for at least a few generations, markets—Radical Markets, that is—will remain the best method of large-scale social organization.

Related Posts