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The Tide Is Turning Against Big Tech’s Monopolies—Because of U. of C.

For decades, economists at the university have argued against antitrust law. The current generation is realizing things may have gone too far.

Economists are just as tired of landing on Park Place as you.   Photo: John Morgan/Flickr via CC 2.0

A couple days ago, BuzzFeed editor-in-chief Ben Smith wrote a piece that got a surprising number of people nodding in agreement: a sense that there’s “blood in the water” from the biggest tech companies in America about antitrust regulation and that “Facebook should probably ease out of the business of bland background statements and awkward photo ops, and start worrying about congressional testimony.”

It might not happen, but Smith seemed to put his finger on a sentiment that’s out there in the right amount, in the right places, that it’s plausible enough for Facebook, Amazon, Google, and their ilk to worry.

Part of the reason it’s out there is the University of Chicago, which has been producing some interesting work on market concentration, its economic effects, and the possibilities of using regulations to counter those. It’s especially novel to be coming from the U. of C., since its economics department is part of how we got to that point in the first place. Back in April, The Economist piquantly noted this:

One sign that monopolies are a problem in America is that the University of Chicago has just held a summit on the threat that they may pose to the world’s biggest economy. Until recently, convening a conference supporting antitrust concerns in the Windy City was like holding a symposium on sobriety in New Orleans. In the 1970s economists from the “Chicago school” argued that big firms were not a threat to growth and prosperity. Their views went mainstream, which led courts and regulators to adopt a relaxed attitude towards antitrust laws for decades. 

We got to this moment because of the free-market Chicago School’s philosophy on monopolies and economics. “Of all Chicago’s law and economics conquests, antitrust was the most complete and resounding victory,” writes University of Michigan law school professor Daniel Crane. “Predictably, the Chicago School exerted its greatest influence in fields closely tied to commercial regulation. But never did Chicago trounce its ideological opponents as plainly and lastingly as it did in the field of its early conquests—antitrust." 

It was a decades-long project; the man most responsible for it was Aaron Director, brother-in-law of Milton Friedman, a University of Chicago law school professor, and the man who brought Friedrich von Hayek’s radically laissez-fare economics to an American audience. Director isn’t as famous as Friedman, but he was a critical part of the school’s move away from more robust government influence in the economy to the hands-off economic neoliberalism usually associated with it.

To make a very long story short, take Director’s student Robert Bork. He’s best known for his failed Supreme Court nomination during Ronald Reagan’s second term, but as a legal scholar and appeals-court judge Bork was arguably the most important influence on antitrust law in the second half of the 20th century. As the law professor Barak Orbach told Dylan Matthews in an interview about Bork’s legacy, Bork changed the purported point of antitrust law. Rather than protecting small businesses, "Bork came around and said that we were protecting inefficient businesses,” Orbach says; instead, Bork turned the focus from monopoly power to whether it harmed “consumer welfare.”

In other words, Bork was okay with a lack of competition among businesses as long as consumers were getting what they wanted and what was good for them. Bork was obviously not anti-competitive, but he believed government should not force market competition. 

From the perspective of Bork’s philosophy, America’s big tech companies are theoretically good for consumer welfare. Google not only offers one of the most important technologies on earth—its search engine—for free, it also accompanies that with a vast and powerful set of apps that are, at least for starters, free. Facebook currently has two billion monthly users, none of whom have to pay anything. Amazon uses its vast real and virtual infrastructure to sell almost anything to anyone at generally competitive prices and fast delivery. Their bigness is arguably the mechanism that makes them consumer-friendly, because their scale allows them to offer their products for free (in the case of Google and Facebook) or cheaper and faster (Amazon).

But after about 30 years dominated by the Chicago School antitrust regime, people are starting to wonder if consumer welfare is the be-all and end-all of monopoly power, if mere price is the measure of welfare, and if the markets are as efficient as they’re assumed.

Take, for instance, a newsworthy paper by Simcha Barkai, who wrote it as a PhD candidate at the University of Chicago (he’s since been hired as an assistant professor at the London Business School). Barkai found that labor’s share of gross value added declined ten percent over the past 30 years in the nonfinancial corporate sector. Meanwhile, from 1984 to 2014, profit increased from 2.5 percent of GDP to 15 percent—about $14,000 per worker, or half of the median personal income in 2014. In other words, there are more profits to go around, but the people doing the work are getting a smaller cut of it.

Meanwhile, the capital share—structures, equipment, and intellectual property—has declined thirty percent. So, workers aren’t getting a smaller cut because companies are investing in business infrastructure.

As Barkai said at the University of Chicago summit, over a 15-year period from 1997 to 2012, the decline in people’s pay was greater in industries with more concentration.

Barkai and others at the conference were essentially playing catch-up after years of the Chicago School regime:

The connection between excessive market concentration and inequality, [Lina Khan] said, has been understudied for a long time. “We were really surprised to see that at the time, in 2014, there really wasn’t much research on this connection at all. The most comprehensive paper that we found was from 1975 by William Comanor and Robert Smiley, which found that monopoly power did in fact transfer wealth to the most affluent members of society and suggested that a more competitive economy would have more progressive redistributive effects,” said Kahn. “One way to understand why this connection between market concentration and inequality has been understudied is that the law decided that it wasn’t really important. Once we shifted from an antitrust approach that took a more holistic and multidimensional view of the effect of market power to an approach that privilege means prices, the research on these effects also took a hit.”

One of the major drivers of this rethinking is Luigi Zingales, a professor of finance at the U. of C.’s Booth School of business and a prolific writer who’s been sounding the alarm about monopoly power and crony capitalism since he saw his adopted country moving towards the dysfunctional model of his native Italy. In his recent working paper “Towards a Political Theory of the Firm”—not an arcane economic tract but a big-think work of legal philosophy—Zingales warns of a descent into a “Medici vicious circle,” a feedback effect between politics and profit that “turned Florence from one of the most industrialized and powerful cities in Europe to a marginal province of a foreign empire,” or “a vertical politically integrated regime a la Latin America.”

This year Zingales also collaborated on New York Times op-ed with his colleague Guy Rolnik (who has praised Bernie Sanders for the candidate’s crusade against regulatory capture). The two considered one of the big dilemmas for curbing the power of Google and Facebook: How would you make a similarly robust alternative possible? Their answer is to make all your social-network data portable, just as phone numbers are portable between carriers. “If we owned our own social graph, we could sign into a Facebook competitor — call it MyBook — and, through that network, instantly reroute all our Facebook friends’ messages to MyBook, as we reroute a phone call,” they write.

The odds of getting a portable “social graph” are, they admit, long. But what’s more interesting than the specifics are that the discussion is taking place and where that discussion is happening—in the heart of the university that curtailed antitrust law. A handful of scholars there played an outsized role in bringing us to this point; a handful might turn the tide.

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