Jan Loeys's Reading List

"The word ‘antitrust’ comes from the late 1800s. The trusts were companies that got together to create holding companies. They acted together. The banker who organized a lot of these trusts was called John Pierpont Morgan. Morgan hated chaos and disorder, and a dynamic, capitalist economy is extremely chaotic. This was the beginning of the railroads, and everybody was setting up railroads. You might have two cities with three or four different railroads going between them. They were all competing, and nobody was making any money. But you don’t need four railroads, you just need one. J.P. Morgan merged a lot of the railroads but why stop at that? He also created US Steel as a merger of all the steel companies. Carnegie and Mellon got involved in that too. Meanwhile, Rockefeller merged the oil companies: at one point he controlled 90% of oil in America. J.P. Morgan created larger and larger holding companies. He was trying to monopolize; he was trying to make money for his shareholders. You may have heard of Warren Buffett , who is known around the world because he has been so good at selecting companies to invest in. He dislikes competitive markets because they don’t make a lot of money. He’s very explicit about it: he wants companies that have a strong moat around them. Then they can really be profitable. Now, there is market power relative to the buyer of the goods, but there’s also market power with respect to people who work for you or labor. The trusts exploited labor. The tenements, the horrible social conditions, you can read all about that in the book by Susan Berfield. The people working in the coal mines were treated horribly. They were working 12 hours a day, six days a week, there was child labor, horrible accidents taking place. Whatever money they made, they frequently had to spend at the company store, and got ripped off again. These terrible conditions really started to get noticed by people. Who was doing this? It was the trusts who were doing it. So one of the points to make is that we don’t really have these horrible social conditions at the moment. We’re all dependent on the big tech companies. They control my information, they use it, and it’s going all over the place. But there’s not enough anger at them yet. There’s a bit of anger at Facebook. The Republicans say they’re a bunch of liberals and are always lying about poor Mr. Trump. The Democrats are saying that Facebook brought Trump in by having the Russians troll and provide misinformation about poor Hillary Clinton. So there’s a bit of anger at big tech, but it’s more by politicians than people on the ground. Get the weekly Five Books newsletter But people do see things. Tim Cook at Apple got paid $600 million a couple of years ago. The numbers are out there. While we can barely afford groceries, couldn’t he do the job for $60 million, or for $6 million? The Trump vote is a recognition that there is anger out there. It’s not that easy for people to say where it’s coming from, but there is a general principle that people do recognize: if things go wrong, it is people with the most power and the most money at whose desk the dollar stops. They must be responsible because they’re benefiting from it. It’s either the government who’s responsible, but who really has power in this country? It’s the big corporates, the big banks. They are responsible for this. They’ll say, ‘It’s not my fault’ but they’re benefiting the most from the system. And what a lot of these books, these economists, are arguing is that it is their fault. Maybe not intentionally, maybe Amazon is a good company that provides these fantastic services. But at some point, power corrupts. That shows up in every book about reality. You’re the good guy, you provide this fantastic service, but you become bigger and bigger and bigger and suddenly you can do what you want. Then you start becoming abusive. The way that Amazon, for example, is trying very hard to prevent unionization of its warehouses. Now, finally, we have a union in Staten Island in New York, the first one to get there, even as the second drive failed. People are seeing Amazon as a bit of an enemy of labor, even though we depend upon it. So Susan Berfield’s book highlights the importance of popular anger about what large corporations are doing. At the moment, large corporations are aware of that. There is a movement that started about two years ago, with large American corporates pledging that the purpose of a company is not purely to maximize profits, but to support all stakeholders: customers, workers, suppliers, the community. With power comes responsibility and if companies do not take responsibility—if we’re not seen to be part of the solution on income inequality, on growth, on climate—we’ll be seen as the reason all that is going wrong. So that is a lesson that companies today are learning. Teddy Roosevelt did not go out and say, ‘I’m going to be cutting back on these companies.’ But he recognized that’s where the power was, and that the big corporates were purely trying to maximize their profits. J.P. Morgan and Rockefeller were the face of that. Without that ugly face of capitalism of large companies, we might not have seen that big antitrust movement."

"Tim Wu is an advisor to Joe Biden on antitrust. The book’s title refers to a book with the same title by Louis Brandeis (1846-1941), the Supreme Court judge who was very instrumental in applying antitrust. Tim’s book brings up what Amy Klobuchar also does (I’ll talk about her book in a minute), that there are two arguments for fighting corporate bigness: one of them is economic, the other is political. The Chicago school never went into the political: they were focused on economics. The economics part is about the exploitation of labor, exploitation of the consumer, excessive pricing. The political part is about an imbalance of power. So in a democratic country, we elect people to make collective decisions for us, they go to Congress, and the system of government was founded—under the typical democratic and liberal system—as a balance of power between the executive, the judiciary, and the legislative. Tim Wu’s argument is that the Founding Fathers, in the 1700s, could not expect that a fourth power would emerge. The Constitution did not do anything to control corporations because there were none to speak of at the time (with the exception of the East India Company, which comes up in Amy Klobuchar’s book). Then, in the late 1800s, the same thing happened as is happening in China now: the government recognized that corporate power is not just bad for labor but for who is running the country as well. A century ago, Americans were saying, ‘Teddy Roosevelt doesn’t run the country, J.P. Morgan does.’ When Teddy Roosevelt needed to end the coal strike for the sake of the country and he could not get the new coal workers’ union and the coal companies to agree, what did he do? He made a call to J.P. Morgan. It was J.P. Morgan who said, ‘Okay, we’re all going to go into some form of arbitration.’ In 1907, there was a financial crisis, and the US government ran out of gold. Who organized the funding? J.P. Morgan. At that point, everyone knew who was running the country, but nobody had voted for him. So the whole political movement against antitrust is around the idea that we, in a democratic society, want power to be balanced, and controlled by the people. The corporates have all this power now, and at some point, they’re going to do bad things with that. That’s the point Tim starts with. Then he brings in two new ideas. Historians can debate whether he’s right. He argues that corporate concentration ultimately leads to an equivalent on the government side, which is fascism. In Germany before World War II, there was massive corporate concentration, much more than in any other country. Big corporates needed a well-organized country, not the chaos of the Weimer Republic and hyperinflation. They needed a partner and that was Hitler . The same thing happened in Italy and Japan. Corporates have massive power, and they want the same power concentration in the government. Effectively, he says, corporate concentration leads to the destruction of democracy and he’s afraid that the same thing will happen in the US. America did not have fascism before because we had antitrust, but at some point, Apple and Google will say, ‘Look at this stupid democracy, we need somebody to run the country properly.’ The second idea, which I thought was very interesting, is about why these big tech companies emerged in America. Europeans and Japanese may have much better engineers than Americans do, how come they didn’t create big tech? Tim’s argument is that one of the last big acts of antitrust was to break up AT&T, which was a telephone monopoly. The UK didn’t do that, you still had BT. All the big European countries had their national telephone monopolies. Japan never really deregulated either. All the original internet technology needed to go via telephone lines. Starting in the 1990s, it was the open access in the US that allowed the big technology companies to grow. Ultimately, allowing open competition leads to innovation and productivity. It’s a very nice example of what the long-term impact is. You might say initially, ‘Oh Amazon is very competitive here.’ But if you give it a monopoly, at some point, its real objective is to prevent anybody else from entering the market. In the process, they destroy competition. That really made me think. Tim Wu also makes the familiar arguments about concentration and income inequality, populism and consumer prices. Internet access in the US is two, three times the price it is in France. Airlines, pharmaceutical products: with so many of these products where you have a concentration of power, you’re paying one heck of a lot more in America than you pay in Europe. Yes. I was virtually at a conference a couple of months ago in Brussels, by Charles River Associates. They have antitrust economists and they brought in Tim Wu and Lina Khan, who is chair of the FTC and Jonathan Kantor, who is head of the Department of Justice’s antitrust division. Jan Eeckhout was there too. All these people I’m talking about were all there in person. It was quite amazing to see them. They speak quite well."

"Yes, she’s not an economist or a philosopher, but a politician. She ran for the nomination for president for the Democratic Party but didn’t make it. She’s from Minnesota, and the book really speaks of her and how she grew up over there. Americans are generally all immigrants or children of immigrants from other countries. They distrust government and big corporates, these huge faceless companies. She loves small companies where people know each other, where customers know each other. She speaks for that love for a world where nobody really has a lot of power over other people. We’re all at the same level, in a democratic system. She completely disagrees with the Chicago school that if companies produce fantastic products, you can let them grow big. She argues, like others, that what is fundamentally needed in a democratic system is a balance of power. When companies get too big, they become too powerful and they mistreat the customer, they mistreat their labor, they mistreat their communities. She says we simply need to reapply antitrust law again (she’s originally a lawyer, as is her husband). It’s a political statement. She says we need antitrust to rectify the imbalance between the rich and those of more modest income. She is angry about the power of money in corporate lobbying in Washington. She says we need to break up the big tech companies, to have divestments. There’s a big brouhaha at the moment about non-compete clauses: if you’re hired by a company, particularly in big tech, your contract typically says you can’t work for a company that competes with it for a number of years. You’re locked into that company, which gives the company a lot of power over you. She says that should not really be allowed. She argues against cross-ownership. She points out that the Vanguards and BlackRocks of this world are massive: they own shares in all companies. She argues that because Vanguard owns shares in every company that forces companies to work together rather than to compete against each other. She says that as an equity manager, it’s in your interest that these companies maximize their profits, rather than competing these profits away. I don’t think there’s any evidence of that, though. In America, we have concentration first in tech, then in the healthcare industry, then in banking, depending on how you measure it. Everybody talks about tech and pharma and the abusive pricing of pharmaceutical products. In Europe, there are price controls. It’s not that we have a lot of competition in Europe, it’s simply that the prices of pharmaceutical products are controlled. In the US they aren’t, and we have this horrible situation of prices going up by 2,000%. The healthcare industry has a lot of market power."

"Yes, very explicitly. He gives you all the metrics of corporate concentration and asks why it’s happening. As I mentioned, in economics there are two schools of thought. There is the Chicago school, call it the right wing, if you want. They see large companies as ‘superstar’ companies, who have more and more new technologies and can take advantage of economies of scale that allow them to lower their unit costs as they get bigger. In microeconomic theory, if your costs are mostly fixed, then the more you sell, the more you can spread these costs out and the lower your price. In technology, this becomes what we call the network effect. So the value of Facebook is proportional to the number of people who are on Facebook. If it’s 100 million, that’s great. If it’s a billion, it’s even better. It becomes what we call ‘a natural monopoly’ in that the optimal economic situation is where there’s only one, because then you can lower your costs massively. In technology, we have more and more of these fixed costs and these network effects, which makes it natural that these companies get bigger and bigger, and more and more concentrated. But with that comes market power. In turn, these companies will then spend money to create barriers to entry, to pass all kinds of laws to make it difficult for other companies to enter. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Thomas Philippon asks, ‘What is the big difference between Europe and US?’ In the US antitrust is a political process. It’s about campaign financing laws. Apparently 70% of the time someone spends in the House or the Senate is involved in raising money! 20 years ago, the financing of electoral campaigns was changed to allow more corporate money to finance politicians. All these big corporate lobbyists are saying, ‘Here’s a big check for your election campaign, I need this and this.’ And if you don’t do that, you have no money and you don’t get reelected. In Europe, a lot of the antitrust regulations come from the European Commission, who are not elected politicians, but bureaucrats. That was part of the issue with Brexit. They are not representing the people, they’re appointed. But, as a result, they can’t be bought. There’s no election campaign for them. So, in Europe, the competition department is run by Margrethe Vestager, who is Danish. She cannot be bought so she is going to make sure that we don’t have excessive corporate power and concentration and abusive pricing. That’s why we have more competitive markets in Europe than we have in the US. That’s Thomas Philippon’s main insight. Every European country has one. The UK has one, in Germany it’s called the Bundeskartellamt. One country where it is extremely powerful and effective is China. China has had its own Anti-Monopoly Law only since 2007, but last year strengthened it to deal with tech companies. It’s not really a question of pricing or economics, it’s about political power. You have the Chinese Communist Party, and you have the corporates. The Communist Party is saying, ‘We’re in charge, not you.’ They’re recognizing that they have to do this, and I can’t disagree with them."

"Yes, he’s showing the impact of all this and how it leads to inequality. It used to be that the biggest inequality was within companies, the CEO versus workers. That’s no longer the case, it’s now between companies. There are high-wage, very effective companies who are outsourcing all their lower-wage jobs. So now you have low-wage companies, and you have high-wage companies; there is job polarization, and the middle class has disappeared. Eeckhout says it’s all about market power, but there’s also globalization, which is a different force. It’s amplifying the impact of market power and big concentration and it’s hard to disentangle. Is it globalization that pushed all the middle-class jobs to China? Or is it the massive corporate power of Apple that says, ‘OK, let’s get all these jobs out of here’? It’s both. He talks about the difference between big cities. It used to be that compensation across cities wasn’t really that different. Now, where the big concentrations are in New York and San Francisco you have massive increases in wages versus other cities where this is not the case. He’s talking about the increase in non-compete contracts, of licensing as a way of keeping other companies or potential entrants out. He really thinks that the patent system is no longer working, that it’s being used to keep other companies out. He talks about the fall in job mobility. These big monopolies don’t necessarily all want to grow, they just want to keep their profits where they are. People used to switch jobs a lot more than they do today. He sees that as part of the lower dynamic business mobility because companies don’t go come and go anymore. They don’t die as much. He is talking about how the brunt of all this change falls on the elderly. Technology changes, market power, he sees it all as one thing. He then links it up with the Deaths of Despair that we talked about by Anne Case and Angus Deaton. The low wage growth, the worsening of health. “The economy and the equity market ain’t the same thing” As to the solution, that’s where it gets a little bit weaker. He wants a third way. He recognizes that these big corporates like Amazon and Google have created millions of jobs. So they are helping the economy overall. The question is, can you keep the good stuff without having the bad stuff, which is that market power ultimately corrupts? He’s a bit waffling there on exactly how you do it. He says he’s neither with the Chicago school nor the Harvard school, which is the Tim Wu, Louis Brandeis approach. He says bigness by itself should not be a sin. Big companies are there because they provide good stuff. But ultimately, excessive power has a negative impact on society, and we need to control that. In technology, he talks about ‘interoperability’, which is a hot topic at the moment. A typical example is Apple. It has its app store. You need to pay Apple for that and Apple will decide who’s on and who’s not. So opening that up a bit as we did many years ago when Microsoft said, ‘you can only use our browser.’ Then the antitrust authority said, ‘No, you have to allow everybody’s browser to be on there.’ That massively reduced the monopoly power of Microsoft. So we need to do the same thing with Apple. I heard him speak at a conference a few months ago. He said, ‘We have an inflation problem in America and we have a monetary policy to deal with that, with 3000 or 4000 economists working at the Federal Reserve. We have a much bigger problem with corporate concentration, but how many people work at the antitrust division? A fraction of that. We need more proper resources for antitrust, and FTC.’ Amy Klobuchar also has several proposals at the moment in the Senate. One of the big provisions is to provide more resources for the antitrust division. Biden is trying to do that also. My main criticism of the book is that he has one little tool, market power, and he uses it to explain everything in the world. There is not always a correlation there. I’m not optimistic. Corporate power is too strong, and the power of money is there. The judges are also going be preventing a lot of this because we have not applied antitrust for 30 years. The US uses a precedent system similar to the UK and there is now a broad legal precedent of allowing these things to happen. The US equity market has been the strongest equity market in the world for the last 15 years because of a doubling of profit margins. The moment antitrust comes back, if it comes back, we will see our equity market do what China’s did, which is crash because then the profits will go away. So antitrust is a big threat to our equity market but it’s good for the economy and the country in the long term. The economy and the equity market ain’t the same thing. China is not managing its economy for the benefit of shareholders, it’s managing it for the benefit of everyone in China. That’s why China is doing better than we are at the moment."