Antitrust in the U.S. is now undergoing disruption. We may be witnessing the rise of the fifth cycle — namely a progressive, anti-monopoly, New Brandeis School. An emerging group of young scholars are inquiring whether we truly benefited from competition with little antitrust enforcement. The mounting evidence suggests no. To be clear, the anti-monopoly New Brandeis School does not suggest or promote unrestricted intervention or the jettisoning of economic analysis in antitrust enforcement. All agree that intervention should be measured to avoid chilling competition, innovation and investment. The question is one of degree. The hope is for an enforcement policy which is carefully designed, but not diluted.



Tim Evans for HBR

What happened to the antitrust movement? This was the question asked by Richard Hofstadter in the mid-1960s. Antitrust, observed the historian, once was the subject of a progressive movement in the U.S. that stirred public agitation and imagination, despite few antitrust prosecutions. By the 1960s, there were many antitrust prosecutions (by both Democratic and Republican administrations), but without any antitrust movement. Fifty years later, the U.S. has neither an antitrust movement nor much enforcement. That needs to change.

To understand the current moment in antitrust and what should come next, let’s take a historical perspective. U.S. antitrust policy and enforcement have waxed and waned over four cycles:

1900–1920. After initial administrative neglect and judicial hostility, this era ushered in the promise of antitrust with the breakup of Standard Oil and the enactment of the Clayton and Federal Trade Commission Acts to prevent the formation of trusts and monopolies.

1920s–1930s. Antitrust activity was rare since administrations generally preferred industry-government cooperation (and, during the early New Deal, economic planning and industry codes of fair competition), over robust antitrust enforcement.

1940s–late-1970s. Antitrust came to represent the Magna Carta of free enterprise – it was seen as the key to preserving economic and political freedom.

Late-1970s–mid-2010s. Antitrust contracted under the Chicago and post-Chicago Schools’ neoclassical economic theories.

The Golden Era of Antitrust

Let’s consider the third cycle (1940s–late 1970s), in many ways the golden era of antitrust action. At the time, competition was seen largely as an antidote to fascism, and antitrust as the enabler of that competition. As Jeffry Frieden’s book Global Capitalism recounts, under the fascist economic order the government, directly or through state-owned holding companies, largely controlled the economy. As the fascist economic order spread throughout Europe and Middle East, and much of Asia and Africa during this cycle, the competition ideal was perceived to be under attack. The competition ideal was the belief, in line with democratic principles, in dispersing economic and political power from the hands of a few, to foster greater opportunities to compete, improve, and win. At one point during WWII, the U.S. and U.K. were its last major supporters.

One prominent advocate of the competition ideal, F. A. Hayek, discussed in his seminal 1944 book, The Road to Serfdom, the significant role private enterprise can play and its superiority over a planned economy controlled by arbitrary government. The economist, however, rejected a “dogmatic laissez faire attitude.” Instead, Hayek advanced the liberal argument of making the most out of the competitive process. The competition ideal is based on the convictions that “where effective competition can be created, it is a better way of guiding individual efforts than any other” and that “in order that competition should work beneficially, a carefully thought-out legal framework is required.” Hayek also recognized that when it is impossible to create the conditions necessary to make competition effective, then we must resort to other methods of guiding economic activity.

Thus, during this third cycle, robust antitrust policy was a central condition necessary for effective competition. To create those conditions regulators relied on the tools given to them during the first era of antitrust, from 1900–1920. In that era, Congress had seen the process of concentration in American business as a dynamic force; so, the Clayton Act of 1914, as amended in 1950, gave the agencies and courts “the power to brake this force at its outset and before it gathered momentum.” The Sherman Act enabled the Department of Justice to criminally and civilly prosecute unreasonable restraints of trade and monopolistic abuses. This 1890 statute “was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade,” noted the Supreme Court in 1958. “It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conductive to the preservation of our democratic political and social institutions.” U.S. antitrust, as part of this competition ideal, was rediscovering the key laws from an earlier era and shaking off the inactivity that had characterized the early New Deal period. This approach was successfully exported after the War to Europe and Japan to help decentralize economic power and promote an effective competitive process.

The Rise of the Chicago School

But antitrust policy and enforcement declined during the fourth cycle (late-1970s–mid-2010s) with the rise of the Chicago School of Economics in the late 1970s, which the Reagan administration endorsed with its enforcement priorities, judicial appointments, and amicus briefs to the Supreme Court. By the Obama administration, we had neither a popular antitrust movement nor many significant antitrust prosecutions. Cartel enforcement remained robust, but otherwise antitrust enforcement waned. The government rarely challenged mergers among competitors. Challenges of vertical mergers were even rarer, with the last one litigated in 1979.

During this fourth cycle, some enforcers viewed the political and moral cases for antitrust as insufficiently rigorous and somehow diluting antitrust policy. Antitrust’s increased technicality and the use of unappealing, abstract neo-classical economic concepts broadened the gap between antitrust enforcement and public concern. Antitrust’s noneconomic goals were jettisoned for an amorphous “consumer welfare” standard. Also discarded was the historic concern about halting the momentum toward concentration in an industry, in order to arrest the economic, political, and social harms from concentrated economic power in their incipiency.

Antitrust during the fourth cycle also relied on an incomplete and somewhat distorted conception of competition. Adopting the Chicago School’s assumptions of self-correcting markets, composed of rational, self-interested market participants, some courts and enforcers sacrificed important political, social, and moral values to promote certain economic beliefs. Competition, for them, was innately effective. Thus, there was no need for robust antitrust enforcement to create or maintain the conditions necessary to make competition effective. Market forces could naturally correct the episodic instances of market power, and could do so far better than the messes caused by government intervention. The authorities accepted the increased risks from concentrated telecommunications, financial, and radio industries, among others, for the prospect of future efficiencies and innovation.

The Emerging Anti-Monopoly Movement

When the United States recently challenged AT&T’s acquisition of Time Warner, some cried foul. The government rarely challenged vertical mergers during the past policy cycle, under the belief that they were highly unlikely to lessen competition or create monopolies. Given President Donald Trump’s apparent disdain of Time Warner’s CNN, the critics argued, this antitrust challenge must be politically motivated.

Perhaps. An alternative explanation is that antitrust in the U.S. is now undergoing disruption. We may be witnessing the rise of the fifth cycle — namely a progressive, anti-monopoly, New Brandeis School.

An emerging group of young scholars are inquiring whether we truly benefitted from competition with little antitrust enforcement. The mounting evidence suggests no. New business formation has steadily declined as a share of the economy since the late 1970s. “In 1982, young firms [those five-years old or younger] accounted for about half of all firms, and one-fifth of total employment,” observed Jason Furman, Chairman of the Council of Economic Advisers. But by 2013, these figures fell “to about one-third of firms and one-tenth of total employment.” Competition is decreasing in many significant markets, as they become concentrated. Greater profits are falling in the hands of fewer firms. “More than 75% of US industries have experienced an increase in concentration levels over the last two decades,” one recent study found. “Firms in industries with the largest increases in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, which suggests that market power is becoming an important source of value.” Since the late 1970s, wealth inequality has grown, and worker mobility has declined. Labor’s share of income in the nonfarm business sector was in the mid-60 percentage points for several decades after WWII, but that too has declined since 2000 to the mid-50s. Despite the higher returns to capital, businesses in markets with rising concentration and less competition are investing relatively less. This investment gap, one study found, is driven by industry leaders who have higher profit margins.

Based on this evidence, an emerging progressive, anti-monopoly New Brandeis School is challenging the status quo. Liberals and conservatives are increasingly warning that consumers are not benefitting from the meager competition in many markets. Their concern is that the current state of competition law (and crony capitalism) benefits the select few at the expense of nearly everyone else. The laissez-faire “Chicago School” ideology has lost some of its appeal, most notably at the University of Chicago. Furthermore, legislation is being proposed to restore the Clayton Act to its original purpose, by, among other things, establishing “simple, cost-effective decision rules that require the parties to certain acquisitions that either significantly increase consolidation or are extremely large [to] bear the burden of establishing that the acquisition will not materially harm competition.”

Some might concede that concentration has increased, that industries with larger increases in concentration have experienced larger declines in the labor share, and that the fall in the labor share is largely due to the reallocation of sales to the dominant firms. However, they argue that these firms achieve their “superstar” status with superior quality, lower costs, or greater innovation. One study, for example, found the rise in industry concentration “positively and significantly correlated with the growth of patenting intensity.” Powerful enterprises and their lawyers, economists, and lobbyists may maintain that all is well — higher concentration levels deliver greater efficiency and markets will, if needed, self-correct. Accordingly, they want to preserve their narrow utilitarian reading of the antitrust laws, which effectively minimizes enforcement.

Others disagree. As the economist Jonathan Baker, citing the recent empirical and theoretical literature, noted, “greater competition—not greater market power—generally enhances the prospects for innovation, and the exercise of market power tends to slow innovation and productivity improvements in the affected markets.” Likewise, the authors of the “superstar” paper observed that some of the firms might gain their dominance legitimately based on their innovations or superior efficiency, but then use “their market power to erect various barriers to entry to protect their position.”

To be clear, the anti-monopoly New Brandeis School does not suggest or promote unrestricted intervention or the jettisoning of economic analysis in antitrust enforcement. All agree that intervention should be measured to avoid chilling competition, innovation and investment. The question is one of degree. The hope is for an enforcement policy which is carefully designed, but not diluted.

Competition in the Digital Economy

The competition ideal is especially needed in the digital economy, as our works Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy and Big Data and Competition Policy explain. Data-driven network effects and the rise of a few key gatekeepers have changed the competitive dynamics: entrants may find it hard, if not impossible, to effectively compete, or challenge the dominant super-platforms. Algorithmic collusion, behavioral discrimination, and abuses by dominant data-opolies can further reduce our well-being. The mythical ability of the markets to self-correct becomes doubtful as concentration levels increase, network effects shield the winners, and commercial strategies enable the entrenched to control and limit disruptive innovation.

So, if the fourth cycle were to continue with a “light-if-any-touch” antitrust review of mergers and a blind eye to abuse, concentration will likely increase, our well-being will decrease further, and power and profits will continue to fall into fewer hands. When monopolies are recognized as an inevitable, permanent part of the economic order, President Woodrow Wilson warned, our last, unwelcome recourse is regulation, where the government invariably will be captured. If we continue going down this path, we may find ourselves with a competitive process that benefits the few at the expense of many and a compromised regulatory framework. Start-ups, small- and mid-sized firms, and many citizens will be left to the beneficence or spite of a few powerful, but arbitrary, corporations.

Luckily, this trend is reversible — if we restore antitrust as a primary condition for effective competition.

Not surprisingly AT&T’s Chief Executive Officer, according to press reports, was “flabbergasted” by the Unites States’ antitrust suit to block his company’s takeover of Time Warner. After all, Randall Stephenson was one of President Trump’s “biggest defenders on public policy” and viewed the antitrust case as “a big curve ball.” The CEO “had plenty of praise for Trump and Republicans in Congress, saying a ‘rationalized’ regulatory environment is simplifying decision-making for businesses and that proposed changes to the tax code would make companies more competitive internationally.” So, when he learned about the first court-challenge of a vertical merger in decades, his reaction was: “Wow, what was that?”

Perhaps it’s the restoration of the competition ideal.