Noel H. Pugach observes that many of the larger themes of U.S. economic history over the last century can be traced back to the 1912 presidential election, during which Theodore Roosevelt offered a vision of “democratic collectivism” while Woodrow Wilson championed the use of antitrust to foster a more competition in various industrial domains:
Wilson, the Democratic Party’s nominee, was originally a conservative, laissez-faire Southern Democrat. But catching the spirit of the times, he adopted Progressivism and passed a remarkable reform program as governor of New Jersey. Now pushed by the Populist William Jennings Bryan and advised by Louis D. Brandeis, Wilson argued that monopolies were inherently evil and that Roosevelt’s solution would result in big business domination of the nation. Increased competition, however, would unleash economic growth at home and abroad while fostering entrepreneurship. His platform was known as the New Freedom.
A funny thing happened on the way to Wilsonian reform, a pattern that would be repeated throughout the following century. Largely influenced by Brandeis, Wilson paid lip service to restoring competition and supporting labor with the Clayton Antitrust Act, but backed the regulatory approach of the New Nationalism.
Congress created the Federal Trade Commission, which mostly protected big corporations from antitrust prosecution, and Wilson’s appointees were friendly to big business. The most critical battle shifted to banking legislation, which required major updates after the Panic of 1907. The Federal Reserve System represented a compromise between government and private control, with Washington taking responsibility for the money supply.
The FTC became the model for subsequent regulatory agencies: the Federal Communications Commission, the Civil Aeronautics Board, the Securities and Exchange Commission and the Federal Farm Board. Indeed, large corporations came to support these institutions because they advanced the interests and agendas of big companies, promoted efficiency and predictability and cushioned them from public criticism and state intervention.
Pugach’s basic thesis is that the American state has largely chosen to accommodate industrial consolidation rather than press for greater competition. I’m most sympathetic to Ashwin Parameswaran’s take on competition, which emphasizes the importance of entry:
The technology industry provides a great example of how disruptive competitive dynamics can give workers a relatively strong bargaining position. … The relative bargaining power of the technology worker is boosted not just by the presence of a large number of new firms looking to hire but also by the option to simply start their own small venture instead of being employed. This vibrant ecosystem of competing opportunities and alternatives is a direct consequence of the disruptive churn that has characterised the sector over the last few decades. This “disorder” means that most individual firms and jobs are vulnerable at all times to elimination. Yet jobseekers as a whole are in a relatively strong position. Micro-fragility leads to macro-resilience.
In many sectors, there are legitimate economies of scale that prevent laid-off workers from self-organising into smaller firms. But in much of the economy, the digital and the physical, these economies of scale are rapidly diminishing. Yet these options are denied to large sections of the economy due to entry barriers from licensing requirements and regulatory hurdles that systematically disadvantage small, new firms. In some states, it is easier to form a technology start-up than it is to start a hair-braiding business. In fact, the increasingly stifling patent regime is driving Silicon Valley down the same dysfunctional path that the rest of the economy is on.
The idea that we can protect incumbent firms such as banks from failure and still preserve a vibrant environment for new entrants and competitors is folly. Just like a fire that burns down tall trees provides the opportunity for smaller trees to capture precious sunlight and thrive, new firms expand by taking advantage of the failure of large incumbents. But when the incumbent fails, there must be a sufficient diversity of small and new entrants who are in a position to take advantage. A long period of stabilisation does its greatest damage by stamping out this diversity and breeding a micro-stable, macro-fragile environment. Just as in ecosystems, “minor species provide a ‘‘reservoir of resilience’’ through their functional similarity to dominant species and their ability to increase in abundance and thus maintain function under ecosystem perturbation or stress”. This deterioration is not evident during the good times when the dominant species, however homogeneous, appear to be performing well. Stabilisation is therefore an almost irreversible path – once the system is sufficiently homogenous, avoiding systemic collapse requires us to put the incumbent fragile players on permanent life support. [Emphasis added]
Rather than focus on perfecting the antritrust regime, which is necessarily backward-lookng, but how do we facilitate entry?