Last week wasn’t great for competition, at least not competition properly understood.
On Tuesday, the chair of the Federal Trade Commission and the head of the Justice Department’s Antitrust Division announced that they were reviewing how they approve mergers and acquisitions since their previous leading indicators—anti-competitive price increases—somehow (magically) did not seem to apply to free products offered by so-called Big Tech companies like Facebook/Meta and Google/Alphabet. It’s worth noting that the FTC is currently suing in federal court to break up Facebook/Meta over its previous acquisitions of Snapchat and Instagram. Assistant Attorney General Jonathan Kanter said “we need to understand why so many industries have too few competitors.” When FTC Chair Lina Khan made her first on camera appearance the following day to discuss the move, she noted that “the goal of the enforcers is to create a marketplace that’s competitive, that’s open, that’s fair.”
On Wednesday, President Biden once again repeated what is fast becoming a mantra for his administration—“capitalism without competition isn’t capitalism; it’s exploitation.” He championed his executive order from last July, claiming that the government would not only “promote competition” but also “tackle unfair competition” and reduce the “domination” of “giant companies.”
On Thursday, hoping not to be outdone by Executive branch action, prominent Democrats and Republicans in the Senate moved forward a jointly-sponsored bill to write into law a new antitrust bill tailored to bring “Big Tech” in line. Similar efforts have been advancing in the House. Despite bipartisan support, not everyone rushing to play the “competition” gambit can agree about what that might look like. Republican co-sponsor Sen. Chuck Grassley opined that the bill “is not meant to break up Big Tech or destroy the products and services they offer” but to “prevent conduct that stifles competition.” Fellow Republican co-sponsor Sen. Josh Hawley demurred, saying “Congress should have acted years ago” and “I think these monopoly-size companies ought to be broken up.” Sen. Hawley has, of course, long been pursuing such legislation, having introduced and unsuccessfully shepherded a more aggressive “competition” bill last year.
Given the splashy headlines, public hearings, and salacious accusations of power, one might be forgiven for believing that the emerging tech sector constituted the sole focus of this new regulatory bugbear. Unfortunately, the use and abuse of “competition” as a cudgel for new interventions into and limitations on market freedom is not so narrow. Anyone tracking this sector knows that everything from meatpacking to insurance services, from book publishing to air travel, has felt the active hand of government in “shaping” and “controlling” the markets.
Taking a wider view, it is clear that this is not just a case of the terrible, horrible, no good, very bad week for competition. The rhetoric around “competition”—whether it has been called unfair, excessive, restrained, lacking, unbridled, manipulated, etc.—has been bad for quite some time. This latest iteration stalks us like a zombie of previously refuted theories, reanimated and hungry for more wanton destruction, but no less rooted in the continued mistakes of the past. Just like the latest zombie movie, of course, there are some novel and disturbing twists in this newest version (more on this below), but the point remains the same—competition is deeply misunderstood, and this misunderstanding stands to inflict serious harm to the economy, to freedom, and to support for capitalism.
Bring Out Your Dead (Again)
If we hope to evade the policy consequences of these reanimated corpses of long-dead economic theories, we need to examine why they keep coming back and what we can do to change that.
The conceptual error driving politicians (of both parties and across the decades), pundits, and regulators to call for more intervention in the economy on behalf of “competition” is in construing “competition” as a static phenomena subject to elaborate empirical measurements. This view regards competition as the existing state of affairs in a given industry relative to the firms producing goods or services as against the consumers of those goods. There is not just an either-or quality to this thinking, as if competition either does or does not exist in a given industry. Sophisticated though ultimately erroneous economic theorizing has also gone so far as to create theories of perfect and imperfect competition.
Since the middle of the twentieth century, though, leading Austrian economists have laid bare the flaws in these models. Friedrich Hayek noted as early as 1946 that competition is properly understood as a process, not a state of being. That is, competition describes the multitude of actions by which individual economic actors discover how to adjust and adapt their behavior to the ever-changing nature of goods and services and talents that are or could become available. As he noted in a later 1968 lecture, competition is what allows individuals to discover how scarce or valuable goods are and to discern what things are even goods.
There remains much to be said on the wider economic debate over theories of competition, and it is worth recalling that Hayek himself was not a consistent advocate of market process against government intervention. Nevertheless, his insight about the static versus dynamic perspective on what competition means is a valuable one.
To concretize my view here, consider the following scenario: is a market with only three firms producing identical goods and selling them for a 5% marginal rate of return more or less competitive than a market with three hundred firms producing slightly-varying goods and selling them, on average, for a 6% marginal rate of return? Or throw another case into the question of more or less competitive: a market with only one producer of a unique good in high demand by a wide customer base with a 3% marginal rate of return?
If your inclination is to think that with a bit more detailed data and application of an econometric model, you would be able to rank these as more and less competitive, that’s a perfect embodiment of the static approach. It smacks of the proverbial economics professor who, when confronted by the student who points out that the classroom economic model doesn’t fit the real-world facts, replies “well, then, the facts must be wrong.”
If instead your inclination is to say that it is impossible to declare one or the other of those markets to be more or less competitive on that basis alone, and especially if you think the reason for that is akin to noting that a still photo is not equivalent to watching a movie, then you’re with me on the process model.
Indeed, a movie is a pretty decent metaphor here. Asking for a judgment about the “competitiveness” of the various markets statically is tantamount to walking into the latest Hollywood thriller half an hour into its screening, watching for five or ten minutes, and then trying to determine whodunit. You simply do not have the context and background that, presumably, a good director would have showcased in the opening and closing phases of the film. So much of the appropriate investigation of whether a market is competitive or not is exactly the backstory that sets up what we see today and the downstream consequences of what is currently happening. It is the preconditions and context, the millions of choices and actions undertaken by millions of market actors across transactions that may span years if not decades.
If Your Only Tool Is a Hammer
By contextualizing “competition” as the active, uncoordinated choices and behaviors of millions of people, it becomes clear that the practical attempt to “control” competition is both foolhardy and deeply immoral.
Consider the question of whether government even has the “correct” policy tools to regulate, or as FTC Chair Lina Khan likes to say, enforce competition. Here, I think it is useful to work through the problem from the end-point backward. The outcome of any Justice Department or FTC enforcement of “compeition” falls into four broad categories—criminal penalties including fines and imprisonment, granting or denying government permission for a business merger, the legally mandated break-up of an existing complex business, and finally, civil penalties paid to “injured” competitors.
The fines, civil penalties, and even penal sanction of the antitrust laws cannot bear a direct relationship to the competitive process in any given market outside of blunt deterrence effects or some theory of long-term adjustment of competitive fitness. Consider the following: imagine Wal-Mart and Mega-Lo-Mart executives were convicted of violation of some aspect of the antitrust laws—say, they had signed contracts agreeing not to open a Wal-Mart in a certain area in exchange for a Mega-Lo-Mart agreeing to close a store in another area where there was already a Wal-Mart. Using their enforcement tools, the government imposed fines on both companies and their executives. How would that change the competitive landscape? Would it suddenly create new rival businesses in either of those areas? Would the executives suddenly switch course and open more or fewer stores? Would the fines and even imprisonment compel them to seek the same customer base? Even a sufficiently large fine against a corporation, such that would imperil short-term profitability, would not magically bring about more products, purchasers, or suppliers to a given market. Competition-wise, nothing would have changed but for the hopes that potential future bad actors would not consider the same actions.
Perhaps, though, the break-up of a massive, supposedly anti-competitive monopoly firm will lead to more “competition,” increases in “consumer welfare,” and more apple pie and Americanism across the board? The detailed history of major antitrust break-ups suggests the opposite. The most notorious Standard Oil case split Rockefeller’s hugely efficient company into 34 separate entities in 1911. Historians and economists have noted since that the market for petroleum products did not substantially change from that action—exogenous market conditions (the sudden growth of consumer-use gasoline powered automotives, for example) and international exploration and development of new reserves had far more effects than the mere separation of the market dominant firm. Indeed, tracing the subsequent history of those 34 companies reveals that the recombination and merger of them has led back to a competitive arrangement where a handful of large firms (made up of old Standard Oil pieces) continues to dominate the market.
At risk of getting tired of spotting nails everywhere as we swing the “competition” hammer, consider finally the possibility of preventive enforcement actions. Perhaps by stepping in before companies acquire increasing marketshare and become capable of being malign actors, the FTC and Justice Department could bolster and support competition by preventing “anti-competitive” mergers? For years, Staples has attempted to merge with its rival Office Depot without much luck. Federal regulators have consistently rejected permission for this business decision to go forward lest the market for office supply products become too consolidated. Most empirical studies, and indeed merely looking at reality, confirm that the forestalling of this voluntary merger hasn’t affected the prices or availability of office products. Given that the same products are available not only from other retailers like Wal-Mart, Target, and perhaps dozens of others, but online merchants, including Amazon, also compete vigorously in this space.
The ultimate cause of why government hammers cannot simply forge a competitive market is because the types of actions that ensure competition—information signalling, entrepreneurship, advanced accounting systems, development of new software in one sector that leads to as-yet unrealized efficiency gains in a wholly separate one, the choice to exit a business or sector by some firms, the merger of two disparate and unexpected businesses from separate industries that find new symmetry, etc.—cannot be mandated from above or imposed on the individuals making those millions of daily decisions without their consent or even knowledge.
While traditional “competition enforcement” has largely restricted itself to fairly clear cases—large mergers, firms with dominant marketshare, coordinated action between rivals—the latest zombie competition theory that’s been developing in the last few years has really pushed the “everything looks like a nail” approach. In the last year alone, the Biden administration pushed the FTC to investigate whether rising retail gas prices were being driven up by “anticompetitive” behavior even though the agency had previously produced a detailed report under the Obama administration indicating otherwise. The new competition rhetoric also featured in complains about the supply chain crisis, the shipping industry, and even basic inflation, only for evidence to point to other more mundane factors like increased consumer demand. Indeed, no less than Paul Krugman, though ideologically favoring a clampdown on business via antitrust, has poured cold water on the notion of inflation arising from monopolies.
Nevertheless, the mantra has fixed itself in the firmament of political debate on both sides of the political divide. When something vaguely related to the economy goes afoul of expectations or even when the latest inanity of culture war heats up online, out march the supposed “defenders” of competition, ready to swing the hammer of government force on offending businesses.
Finding Solutions in Reframing?
The current state of affairs is not a pretty one. It makes it difficult if not impossible to propose solutions of any kind that don’t amount to: “stand there, don’t just do something.” Really. It’s deceptively easy to recommend that Congress repeal all antitrust legislation, severely restrict the scope of the Federal Trade Commission’s mandate, and focus instead on imposing a clear set of rights-upholding laws around property, contract, and tort. It is a set of arguments that belong to what Robert Tracinski has aptly labeled “Libertarian Debate Club.” It’s a great thought-experiement to ferret out what an ideal state might look like, but it offers incredibly little in the way of real world guidance for understanding where we are today.
The best advice I can give is to adopt a simple methodological reframing, which has admittedly pretty complex and intricate implications. Instead of asking what government can do to restore/enforce/encourage/support competition in a given market, why not ask, what previous government regulations, misaligned incentives, barriers to entry (licensing, inspections, compliance costs, etc.), or favors created this situation in the first place and how can we roll those back. To complement this, we also have to ask, if there is a real issue that those regulations were set up to solve, how can we devise market solutions to those problems to better achieve a system of freedom. So, for example, instead of proposing to spend one billion taxpayer dollars to subsidize a new meat processing company in the hopes of competing against established firms, why not ask what market structures created by overlapping government regulatory agencies (FDA, USDA, OSHA, etc.) brought about the economic incentive to consolidation in this industry? What factors in simple business efficiency contributed to the consolidation? And which ones came about only as an unforeseen byproduct of other regulations?
This approach features what I think is an important mindset shift that I’d like to see a lot more often—the idea that when some regulated market and mixed economy industries lead to results that are widely judged to be “unfair” or “rigged,” people would look first not to a new law or rule to fix it. Instead, they would ask, what broken or misbegotten law or regulation created this problem in the first place. That way, we can focus on starting to roll back bad laws instead of encrusting the law books with ever more new ones to “fix” the previous ones. The result would be to shift more focus on the ways that the market can actually operate to achieve the ends people seek, if only the market-distorting and freedom-limiting laws weren’t in the way. Restoring a belief in the power of markets requires this kind of methodological shift in debate.
Anti-capitalists typically condemn capitalism because it IS a process, because its not a frozen Platonic Form known by mindless intuition. Mises is especially clear on this, even claiming that equilibrium is always a changing potential that never actualizes. But, then, anti-ideological, anti-capitalists condemn capitalism because its static. Note the anti-capitalist consistency.
Another, influential, false view of competition is that it is, properly, communist, i.e., a market of many, equally small firms. There can be no pseudo-math, Gini-coeefficient that measures the proper number of firms in a market. And, of course, which market? Does Coke compete against Pepsi, coffee, liquor, tap water, bottled, enchanced water. Only arbitrary trust prosecutors know. As Hayak said, capitalism is continuous discovery.
In fact, Joseph Schumpeter, Frank Knight, G.L.S. Shackle, and Rand, with their stress on economic change or innovation, should be more central to economic thinkng. Knight went further, with uncertainty. Shackle even denied the possibility of a science of economics. I believe, however, that Shackle was implicitly discussing the free will of entrepreneurs as invalidating government economic regulations.