The economists' revolt

The new antitrust movement is being led by scholars. Some of them are economists.

In 1970 historian Richard Hofstadter noted that antitrust, which had once been a populist cause, was now an elite activity; antitrust won its many mid-20th-century victories in the courts, not on the streets. If the new antitrust movement wins more victories now, the story will be similar. A few antitrust writers like Matt Stoller style themselves as populists, and there is some genuine popular anger at big tech companies. Biden certainly tries to sound a populist note:

And some on the left are cheering him on. Overall, though, the idea that corporate concentration is choking off American capitalism is overwhelmingly an elite academic idea.

Biden’s two chief warriors in the fight against corporate concentration, FTC chair Lina Khan and DOJ antitrust chief Jonathan Kanter, are part of a legal movement known as the “Neo-Brandeisian” school of thought (in fact, Khan is generally held to be the founder of that school). The basic idea is that corporate concentration and corporate power have negative ramifications for society that go far, far beyond the narrow idea of consumer welfare that legal and economic scholars traditionally consider.

Some of these potential harms are political — for example, big companies might amass so much influence in government that they can rig the system in their favor. But many of the potential harms are economic. And here’s where we get to a very interesting feature of the new antitrust movement — the importance of economists.

Back in April, Ezra Klein wrote a post asserting that economists have less influence in the Biden administration than they had in years past. His main example was climate economists, who have indeed lost cachet in policymaking circles, and rightly so. But when you look at the new antitrust movement, it’s a whole different story.

For a number of years, economists have been writing papers warning about various harms from the rise in corporate concentration. Here are a few examples.:

1) “Concentrating on the Fall of the Labor Share” and “The Fall of the Labor Share and the Rise of Superstar Firms”, by Autor, Dorn, Katz, Patterson, and Van Reenen (2017)

  • These papers invoked the rise in corporate concentration as an explanation for labor’s falling share of national income in recent decades. The authors equivocated on whether this was a bad thing, since they attribute it to a few “superstar” companies being much more productive than others. But they clearly show how this can lead to socially undesirable effects that have little to do with consumer welfare. Gutierrez and Philippon (2019) cast doubt on the usefulness of these “superstar” companies by showing that their contribution to overall productivity growth has fallen since the turn of the century.

2) “Evidence for the Effects of Mergers on Market Power and Efficiency”, by Blonigen and Pierce (2016)

  • This paper looks at mergers in the manufacturing industry, where it’s relatively easy to measure productivity at the factory level. The authors find that on average, mergers don’t increase factory-level productivity, don’t lead to reallocation of production to more productive factories, and don’t lead to reductions in administrative costs. They do, however, allow companies to jack up prices and make higher profits. This is evidence that market power, rather than just productivity, is a factor in industrial concentration.

3) “The Rise of Market Power and the Macroeconomic Implications”, by De Loecker, Eeckhout and Unger (2019)

  • These authors document rising markups and profits throughout much of U.S. industry, driven by the upper tail of a few dominant companies. Using fairly simple macroeconomic models, they show how this can lead to a falling labor share, falling wages and employment for the low-skilled, and a less dynamic labor market. Again, this adds to the potential harms of labor market concentration, far beyond consumer welfare, bolstering the ideas of the Neo-Brandeisians.

4) “Labor Market Concentration”, by Azar, Marinescu and Steinbaum (2017)

  • This paper establishes an empirical link between labor market concentration and wages at the local level, showing that fewer employers means lower wages. Though this doesn’t necessarily tell us about the harms of national-level industrial concentration, it does establish that market power has a very real effect on wages. This finding is backed up by other papers such as Benmelech, Bergman and Kim (2018) and Rinz (2018) (though Rinz notes that local employer concentration has actually been falling as national chains compete more intensely in small towns). In another paper, Azar, Huet-Vaughn, Marinescu, Taska, and von Wachter (2019) show evidence that local labor market power explains why minimum wage doesn’t affect employment as much as many economists used to predict.

5) “Investment-less Growth: An Empirical Investigation”, by Gutierrez and Philippon (2016)

  • In this paper, the authors show that U.S. business investment has been low since 2000, when measured against traditional measurements of the attractiveness of capital investment (like the ratio of market value to book value). They present evidence that decreased competition is one factor behind the investment slowdown. Again, this shows potential harms from corporate power that go far beyond consumer welfare, and implicate big business in the problem of slow growth itself.

6) “Labor Market Power”, by Berger, Herkenhoff, and Mongey (2019), and “Quantifying Market Power and Business Dynamism in the Macroeconomy”, by De Loecker, Eeckhout, and Mongey (2021)

  • These are theory papers. In the first, the authors create a theory of the macroeconomy in which labor market power reduces national welfare significantly. In the second, the authors allow for both technology and market structure (i.e., government letting companies get big) to affect the economy, and find that both have contributed to industrial concentration. They connect increasing market power to declining dynamism, falling wages, and low labor force participation.

There are many more, but this gives a flavor of how economists have attacked the problem. They have also raised the alarm about corporate power in other forums — Thomas Philippon’s book The Great Reversal: How America Gave Up on Free Markets, John Kwoka’s book Mergers, Merger Control, and Remedies and his 2017 report on mergers, and various speeches sounding the alarm at Federal Reserve conferences. (Update: I was remiss in not mentioning Jason Furman’s briefs on market power when he was chair of the Council of Economic Advisers under Obama! They were very influential. I also neglected the interesting and often-overlooked role of sports economists, who have been complaining about market power for quite a while!)

Economists haven’t just been commenting on antitrust issues — they’ve been leading the intellectual charge.

It’s possible to see this as an outgrowth of the economics discipline’s move to the left in recent decades, but really it comes from the deep principles of the field. Economists have been suspicious of excess profits ever since Adam Smith complained about “the bad effects of high profits” and declared that “people of the same trade seldom meet together…but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The idea that competition should reduce profits to a low level in a well-functioning economy is Econ 101, as is the theory of monopoly. Biden’s tweet about capitalism and competition might sound like bold populist rhetoric, but it also could have come right out of an econ textbook.

Not everyone on the left is cheering. Although many are happy to see the government going after corporate power, some prominent socialists are highly suspicious of the justification behind the move. Some ridiculed Biden’s tweet:

Writing in Jacobin, Doug Henwood explains why socialists often distrust antitrust:

Behind antitrust is a faith in competition as a positive good. As socialists we should take exception to that. We already have too much competitive individualism in this society, and we don’t need any more. We need solidarity. Stimulating the war of each against all isn’t the way to get there…

[P]ursuing antitrust may be a campaign to restore the prestige of capitalism itself. Fronting small business as the emblem of commerce is a classic bourgeois self-defense strategy.

To socialists, the problem with capitalism is not lack of competition, but capital itself. Whether private business owners are few or many, socialists see them as inimical to a just society. Fostering competition, people like Henwood reason, would only serve to fix some of the problems of capitalism, making it harder to destroy it utterly.

But it’s economists, not would-be destroyers of capitalism, who have the ear of the White House on this matter:

Twitter avatar for @mioanaIoana Marinescu @mioana
🎉Yay! The @WhiteHouse cites our “Labor Market Concentration” paper in the executive order fact sheet!🎉 With @joseazar @Econ_Marshall…

The JHR @J_HumanResource

#Biden looks to address concerns about the #BigTech sector. WH fact sheet cites "Labor Market Concentration," by @joseazar, @mioana, and @Econ_Marshall who predict a double-digit percentage fall in tech salaries in consolidated markets.

What this means is that economists are included in the vanguard of this revolt against American corporate power, while those who wait for the day of Revolution are sitting on the sidelines. Economists make unlikely crusaders, but here they are, taking on the biggest companies in the country.

Can they win?

Update: A few people have pointed out — correctly — that the economists who are providing the intellectual support for the new antitrust movement are generally not from the field of industrial organization, which is the field whose job it is to study competition! Instead they’re from macro, labor, and a number of other fields that traditionally didn’t consider antitrust. This is an interesting phenomenon, and something I’ll write about in a later post…