The hipsters are coming. Not satisfied with replacing your morning latte with a single-origin filter, hipsters are behind the antitrust movement making a bold play to reinvent the way countries enforce the laws that stop businesses from misusing their market power to kill competition.
The movement began in the United States when a number of young legal scholars began questioning the effectiveness of antitrust laws in regulating market power. They argued that courts have been too willing to ignore the economic and political risks of rising market concentration. Despite the pejorative “hipster” moniker, their ideas are finding receptive ears in both political and policy circles.
One of the hipsters is Tim Wu, a professor at Columbia Law School. Wu has form as a policy innovator. Dubbed the “father of net neutrality” — he coined the term and has been an effective proponent of the policy — Wu’s latest (appropriately small) book, The Curse of Bigness: Antitrust in the New Gilded Age, is a treatise on the failures of America’s antitrust laws. He argues that regulators and courts have interpreted these laws so narrowly they have rendered them virtually ineffectual.
Wu sees the rise in corporate “bigness” as not just an economic problem but also a political one. He contends that, like in the “gilded age” of the late nineteenth century, when the big trusts such as Standard Oil and US Steel flexed their political muscle, the current world in which big players wield special influence over lawmakers is fuelling inequality and public dissatisfaction with the political system. His warning is stark: failure to rein in corporate power will fuel the rise of populism and nationalism as people agitate against the status quo.
Another of the hipsters, Lina Khan, became a famous critic of the antitrust enforcement regime even before graduating from her law degree, when an article she penned in the Yale Law Review went viral. The questions she raised about the long-term risks of the growing size and reach of Amazon, and the seeming inability of antitrust laws to control it, tapped into the zeitgeist of growing unease about the power of the big tech companies.
Backing up the hipsters, at least on the diagnosis, is one of America’s leading antitrust scholars, Jonathan Baker. His book, The Antitrust Paradigm: Restoring a Competitive Economy, is the scholarly yin to Tim Wu’s engaging yang.
Baker opens with a surprising statistic: 75 per cent of US beer sales are controlled by just two companies. He chronicles the rise in market concentration across many important sectors of the economy, including airlines, pharmaceuticals, telecommunications and, of course, technology. He argues that this consolidation has resulted from the under-enforcement of antitrust laws, increased government restraints on competition, and the fact that market power, once established, has proved hard to budge in many sectors.
Baker and Wu both draw on the history of American antitrust law, highlighting how enforcement has waxed and waned, depending on the key players and economic circumstances of the day, for more than a century.
The Sherman Act, passed in 1890, was designed to quell rising discontent about the dominance of the big trusts. The many and varied motivations of its proponents included concerns about the evils of monopoly pricing and a desire to protect the interests of farmers and small producers, tackle rising inequality, and safeguard a democracy that Senator John Sherman, the act’s proponent, believed to be threatened by the “kingly prerogative” of huge businesses.
Teddy Roosevelt was the first president to activate these laws, with cases against the big trusts, including J.P. Morgan’s railroad monopoly and John D. Rockefeller’s oil dynasty, earning him the nicknames “trustbuster” and — my favourite — “octopus hunter.” Roosevelt’s motivations were as much political as economic: he feared that the private power of the trusts would come to rival the government’s power. “When aggregated wealth demands what is unfair, its immense power can only be met by the still greater power of the people as a whole,” he later wrote.
The embrace of antitrust laws to limit the political and economic power of big firms runs like a thread through the case law across the mid twentieth century. But from the late 1970s, the thread begins to fray.
In 1978, legal scholar Robert Bork released The Antitrust Paradox, a forceful distillation of the ideas long percolating among conservative Chicago School academics. In both Baker’s and Wu’s accounts, Bork’s book triggered a fundamental change in the nation’s approach to antitrust enforcement.
Aaron Director, an influential Chicago School lawyer who had taught Bork, had long advocated that antitrust laws should have only one objective: the enhancement of consumer welfare. Bork’s genius was to brazenly suggest that promoting consumer welfare was the original (and sole) intent of these laws — despite the weight of evidence to the contrary.
But perhaps Bork’s more substantive achievement was to change the way we evaluate economic harm. The Chicago School largely equated consumer harm with short-term price effects. The longer-term economic and social costs of greater concentration were left out of the equation. Bork and his allies contended that most of the conduct previously tackled by regulators and courts was actually efficient business practice that would benefit consumers by reducing prices.
In Bork’s view, only a very narrow set of practices should raise the heckles of enforcers: naked agreements between competitors to fix prices or divide markets, and mergers that create duopolies or monopolies.
Gradually these ideas took hold among the judiciary and the enforcement agencies, leading to what Baker describes as an incremental hollowing out of the previous antirust doctrines. While the authorities developed increasingly sophisticated tools to try to assess price effects, other consumer harms from bigness, such as concerns over privacy, product quality and long-term incentives for innovation, were downplayed.
Australians are pretty familiar with bigness. We can count our airlines, our banks and our supermarket chains on one hand. Internet services, liquor retail, pathology services, newspaper publishing and casinos are also highly concentrated.
The jury is out on whether the big are getting bigger. Grattan Institute analysis suggests the revenues of our biggest listed firms — whether the top twenty, fifty or one hundred — haven’t grown as a share of the economy over the past decade. But recent research by the federal industry department using firm-level data suggests that market concentration has been increasing since around 2007, most of it in sectors that were already relatively concentrated.
And Wu’s “curse”? In fact, some of what the industry department is picking up is the growing size of our export-competing businesses. These industries have become more productive, and so their size is likely to be of economic benefit rather than concern.
But not all bigness is benign. Grattan’s analysis highlights the fact that in many sectors with high market concentration, returns are above what we would expect given levels of risk. And these high returns seem to be enduring: when we track companies in the top 20 per cent by return on equity for a decade, more than a third are still in that top-performing group a decade later.
In markets with strong competitive pressure, we would expect to see high returns eroded by new entrants or expansion by existing competitors. Persistent high returns suggest that there are pockets of the economy where competition isn’t working as it should.
Australian regulators and courts were never in the thrall of the Chicago School in the same way as their counterparts in the United States. Recent Australian Competition and Consumer Commission chairs have built their personas on taking tough actions against companies breaching Australian competition laws. The interim report of the banking royal commission contrasted the ACCC’s robust enforcement approach favourably with the more timid enforcement culture of the banking regulator, ASIC. The ACCC’s leaders were hipster trustbusters before it was cool.
But it would be naive to think Australia was impervious to the influence of the Chicago School. The ACCC, like all major regulators internationally, focuses on preventing conduct that would generate economic harm to consumers. Using competition laws to protect competitors or tackle inequality or deal with the political risks of “bigness” simply isn’t on the menu.
Nor have the Australian laws always worked as they should. ACCC chair Rod Sims has been active in calling for more powers to protect consumers. He has got most of what he has asked for: a beefed-up legal test for pursuing misuse of market power, a market-studies function so the ACCC can initiate its own market reviews and make policy recommendations, and a world-first, government-commissioned review of digital platforms.
More recently Sims has been eyeing the legal test for the ACCC to knock back mergers it believes are anticompetitive. He points to the ACCC’s desultory performance in merger cases before the courts and the competition tribunal: not a single win in a contested case over the past twenty years. If the ACCC loses its bid to block the Vodafone–TPG merger currently before the courts, you can bet that these calls will only get louder.
Wu’s and Baker’s books both seek to chart a way to strengthen antitrust laws and their enforcement. But they ultimately diverge on the question of how radical the solution should be.
Wu wants revolution: a return to the pre–Chicago School world where the regulators and courts could intervene based on wide-ranging concerns about bigness. He would like to see the consumer-welfare standard jettisoned and replaced by a “protection of competition” test. Wu argues this would allow regulators more scope to capture the dynamics of competition as well as political considerations, returning the United States “to an economic vision that prizes dynamism and possibility, and ultimately attunes economic structure to a democratic society.”
Baker also makes the case “to reverse a trend toward non-enforcement,” but charts a more measured set of changes. He argues, in my view persuasively, that a return to mid-century antitrust laws that explicitly pursued political as well as economic ends is neither feasible nor desirable. The benefits of trying to reverse the march of economics in antitrust are highly unclear, and the approach is so entrenched in the major institutions that such a significant course correction is unlikely.
Baker rightly points out that there are other policy levers, such as campaign finance reform, that can help address concerns about political power. Grattan Institute has laid out an agenda for better regulating undue political influence in Australia, including tighter rules on lobbying and around money in politics, and the creation of a robust federal anti-corruption commission.
Baker proposes a series of rules and (rebuttable) presumptions to make it easier to prosecute antitrust cases. He argues, for example, that in merger cases the courts should require more evidence to rebut the inference of competitive harm from high and increasing market concentration. He also calls for stronger controls on mergers in innovation markets, to stop big tech firms such as Facebook and Google snapping up nascent competitors.
Sims and the ACCC may have been taking notes, if recent soundings about re-examining the standard of proof for merger cases and being wary of firms acquiring potential competitors in digital markets are anything to go by.
And this is where the rubber hits the road. Bork’s role in antitrust history shows that ideas hidden in drab-looking academic texts can change the way powerful people think and economic systems operate. Wu and the hipsters have energised the political mobilisation against market power in the United States. Wu’s highly readable small book about bigness is one to dip into for an appetising taste of that discussion. But Baker provides the wisdom and the deep scholarship to chart the way forward. Let’s hope his is the book that Sims and his American counterparts have on the bedside table. •