Why Western capitalism is under threat
Without competition, capitalism withers away, says Denise Hearn, author of two books on the subject. She talks to Matthew Partridge about industrial concentration, patents and US antitrust legislation
Matthew Partridge: The basic argument of your first book, The Myth of Capitalism, which you co-wrote with Jonathan Tepper, was that American capitalism, and by implication, capitalism in the rest of the West, is under threat owing to a lack of competition caused by increased industrial concentration and the use of regulation to hamper rivals.
Denise Hearn: Yes, the book argues that capitalism without competition is not capitalism. When it came out in 2018, many people didn’t recognise just how pervasive concentration was across so many different industries. To take two examples we gave in the book: four airlines completely dominate airline traffic, often enjoying local monopolies or duopolies in their regional hubs, while over 75% of households have no choice when it comes high-speed internet, only having access to one provider. My current book, The Big Fix: How Companies Capture Markets and Harm Canadians, written with Vass Bednar, focuses on the competition problems that Canada faces, especially with companies that dominate multiple industries. But the same scenario applies to the US, EU and the UK.
MP: So which sectors do you think are currently especially affected by this lack of competition, is it particularly prevalent in sectors such as technology – and does this issue hurt the entire US economy?
DH: We’ve seen waves of mergers and acquisitions across nearly every industry imaginable and in the US that’s happened in everything from veterinary practices and magic-mushroom facilities to dentistry. You could argue that some of the digital industries possibly lend themselves to economies of scale. But there’s also been a lot of consolidation in highly localised services, such as funeral services.
MP: Does this lack of competition result in higher prices and what are the other negative effects?
DH: There’s definitely a sense that American business has become less dynamic. Data from both the US Federal Reserve and the National Bureau of Economic Research (NBER) show that in recent decades there has been a decline in the number of firms entering (and exiting) various sectors. There’s also a sense that it’s harder for little guys to get a foothold, especially when there is a gatekeeper, such as Amazon or Google, blocking their access to markets by demanding a large chunk of their revenue, or by pushing up the cost of advertising. We often think of small firms needing access to capital, but we don’t consider their access to fair markets as key to becoming challengers.
MP: Do you think that this kind of lack of competition is partly responsible for the fact that polls say younger people are much more hostile to the idea of capitalism and free enterprise than they used to be?
DH: I think so. It almost seems that the social contract that existed for my parents’ generation, whereby you went to school, got a good job, could afford to buy a house and raise a family, doesn’t work that way anymore. While there are many reasons for that, one is the increasing realisation that everything from veterinary practices to the sweets they buy at the grocery store is really all owned by just a small number of firms that have incredible market power, with consumers rendered relatively powerless.
“There has been consolidation in industries ranging from dentistry to magic-mushroom facilities”
MP: In the past few years, we’ve seen a more activist competition policy, led by people such as Lina Khan, head of the US Federal Trade Commission (FTC). Is this having an impact?
DH: Mergers have dwindled over the past two years, and while this was partly due to higher interest rates, another reason was stronger antitrust enforcement under the Joe Biden administration, with Khan at the FTC and Jonathan Kanter at the Department of Justice antitrust division. Both have been much more aggressive about blocking mergers and taking on anti-competitive conduct. But it is structurally difficult to stem the tide, because the capital markets like firms in concentrated industries: these conditions make it easier for firms to deliver consistently high, repeatable returns. Research by the NBER estimates that the average mark-up above production cost went from 18% in 1980 to 67% in 2017. The OECD has found a similar trend globally.
MP: How do you see the antitrust case involving Google and the other big technology firms panning out? And do you think that if Alphabet is forced to make some major changes to the way it runs it would be a good thing for consumers?
DH: The agencies had been dormant for decades, so the fact that the Google case is taking place at all is a historic win for the Department of Justice. The rumours are that it’s looking seriously at a break-up, or a “structural separation” that would divide core business lines in a way that would massively disrupt the company. However, those who are arguing that this will be bad for the tech sector need to realise that companies break themselves up all the time. One third of merger-and-acquisition (M&A) activity actually comprises divestitures. Companies are adept at breaking themselves into component parts, and often they do so because they recognise that they’ll be more valuable independently than they are together. So, a conglomerate such as Google may end up being more valuable if it is broken into smaller units.
MP: What further policies would you like to see implemented in the future to increase competition?
DH: Well, I’d like them to continue with some of the historic policies that we’ve recently seen in the US (and even Canada). That includes steps such as the updated merger guidelines in the US, which have made it easier to challenge mergers on competition grounds. The executive order on competition that Biden put forward has prompted the whole of government, rather than just the antitrust agencies, to think about competition issues. Governments now need to adopt a more holistic approach, including understanding that supporting so-called “national champions” is not always in the public interest, and actually can sometimes lead to less resiliency and less innovation.
MP: It’s interesting you mentioned that as several people, especially Michel Barnier in Europe, have argued that we need big national champions to compete with China, which, of course, is the absolute opposite of antitrust and competition. Do you see that as a big threat to antitrust?
DH: Yes, I think those who advocate national champions tend to overlook the fact that most of these big firms are global firms with global shareholders, and they will go against the national interest if and when it suits them. What’s more, trying to create a few national champions can make supply chains more fragile. For instance, the US Department of Defence, prompted by Biden’s executive order on antitrust, looked at its supply chain and realised that it was reliant on only a few suppliers for major sources of parts; that actually amounted to a national security risk.
“Pharma companies buy rival drugs just to take them off the market”
MP: One area you talked about in The Myth of Capitalism is patent law, primarily regarding companies being granted overly broad patents. You also point out that even when patents have expired regulations have made it hard for drug companies to get generic versions of drugs approved. Do you think there’s scope for reform in patent law?
DH: It certainly appears so. Companies can use core intellectual property (IP) to restrict the freedom of other firms to operate, or they can act as gatekeepers charging high tolls for access. There are patent wars across the world on everything from AI to pharmaceuticals. There have even been cases of drug companies engaging in “killer acquisitions”, whereby they acquire a rival drug just to take it off the market to eliminate a competitive threat. A 2021 study based on two decades of data estimated that between 5% and 8% of pharmaceutical acquisitions are undertaken explicitly to remove a rival drug from the market. So there are cases where drugs or innovations aren’t actually reaching the market because there are established firms that have an incentive to make sure that they aren’t available.
MP: Vice president-elect J.D. Vance has been surprisingly positive about Khan’s work at the FTC. Do you think that this is just rhetoric and that the new Trump administration will undo some of the good work Biden has been doing?
DH: I think that an underappreciated element of the antitrust movement has been its bipartisan nature in some cases, particularly in the tech industry. So I believe that J.D. Vance is being serious when he says that Khan is Biden’s best appointment. Some of the tech cases were actually brought under the Trump administration. So I think that while the pace may slacken, you will see continued pressure on the tech firms under the new Trump administration.
After all, there are a number of Republican constituencies such as farmers or small business owners who are very supportive of increased antitrust enforcement. What’s more, while everyone pays attention to the federal cases, the states can also bring antitrust cases. There have been multi-state coalitions bringing cases together in agriculture, tech and other areas. That sort of bipartisan collaboration will continue regardless of what happens at the federal level.
I think competition policy can sound obscure and technical, but it’s crucial. It looks at where power manifests itself in markets and how that power is wielded against economic stakeholders, including consumers, citizens, workers, small business owners, and so on. If we get it right it can create more wealth and lead to fairer outcomes without any further government intervention. That is worth fighting for.
Denise Hearn is a Senior Fellow at Columbia Center of Sustainable Investment. She co-wrote with Jonathan Tepper “The Myth of Capitalism: Monopolies and the Death of Competition”, published by Wiley. Her latest book, “The Big Fix: How Companies Capture Markets and Harm Canadians”, with Vass Bednar, is published by Sutherland House Books.
