“THE best of all monopoly profits is a quiet life,” wrote Sir John Hicks, a British economist. Without competitors breathing down their necks, monopolists find it easy to make large profits: just ask the 46m American households served by only one fast-broadband provider, who pay high prices for poor service. As a result, trustbusting is one of those rare causes that can unite raging populists with sober academics. So the wonks may well have agreed with the sentiment, if not the fine detail, when Senate Democrats unveiled a fresh pledge on July 24th to make America competitive again as part of their economic agenda. “This economy is rigged,” insisted Senator Elizabeth Warren of Massachusetts. It is not quite that bad. But more than three-quarters of industries are more concentrated than they were two decades ago, and the economy is also seeing less turnover of firms (see charts).

It is easy enough for consumers to see the consequences when monopolists entrench themselves in one industry. A recent study found that American consumers would gain $65bn a year if they paid the same as Germans do for mobile-phone contracts. But when competition ebbs across the economy as a whole, what broader costs does that impose? New research by Germán Gutiérrez and Thomas Philippon of New York University (NYU) gives an answer. Growing market power, they argue, has contributed to a dearth of business investment that started in the 2000s and worsened after the financial crisis of 2007-08.

The promise of monopolies can encourage investment. The lure of temporary exclusivity makes it worthwhile for the pharmaceutical industry to research new drugs, which can sell for next to nothing once patents expire. Silicon Valley investors burn huge piles of cash in pursuit of “network effects” and a user base that might allow them to dominate markets later. Yet, once a firm wins a power struggle, it can, like a medieval king, sit back and get fat on the proceeds.

Messrs Gutiérrez and Philippon benchmark investment against “Tobin’s Q”, the ratio of a firm’s market value to its book value. A high Q signals that an industry is earning a lot from its assets, which, all else being equal, suggests it should invest more. The authors show that America’s investment has fallen most substantially, relative to Q, in concentrated industries. In these sectors, investment has also fallen more than in Europe.

To explore the issue further, the authors draw a distinction between “laggards” and “leaders”, defined as firms comprising the top third and bottom third, respectively, of an industry’s market value. Laggards, they reason, are more likely to wither in the face of competition, so their investment might be expected to fall. Leaders, though, should be up for a fight if rivals challenge them; their investment should rise. They find it is leaders, not laggards, who are responsible for the bulk of the investment slowdown, suggesting a lack of competition.

These trends are only circumstantial evidence. To show that competition causes higher investment, Messrs Gutiérrez and Philippon appeal to two natural experiments. First, they study manufacturers that were exposed to unexpected competition from China as it gained a large share of world trade in the 2000s. They find that the “China shock” caused an investment gap to open between leaders and laggards, as some firms tried to fight off the surge in imports and others folded. (Overall investment fell; Messrs Gutiérrez and Philippon concede that this can happen when competition originates abroad.)

Next they examine a domestic shock—a wave of startups founded during the 1990s tech boom. Amid the euphoria, new firms giddily entered some industries at a rate that could not be justified by economic conditions. The authors find that the added competition associated with “excess entry” did indeed spur investment during the subsequent decade.

These results suggest that Hicks was right. Declining competition does more than harm some consumers; it makes firms lazy. The authors calculate that if leading firms had maintained their share of overall investment since 2000, the American economy would have 4% more capital today, an amount roughly equivalent to two years’ investment by non-financial companies. That would have been good in itself, but more investment might also have jolted the economy out of its slump after the financial crisis. From 2009 until the end of 2015, American interest rates were at rock bottom. In another recent paper, Mr Philippon and Callum Jones, also of NYU, argue that if competition had not declined after 2000, investment spending would have lifted interest rates off the floor fully four years earlier.

All firms aren’t created equal

Concentration may also hurt workers. Recent research by David Autor of MIT and four co-authors finds that “superstar” firms pay out less of their profits in wages. As these firms have grown in importance, labour’s overall share of GDP has fallen. Other research suggests that these firms nonetheless pay more, in gross terms, than ordinary firms, so their rise has directly contributed to inequality. This does not chime exactly with what Democrats claimed this week—that America’s firms have too much power over workers—but the end result, greater inequality, is similar.

The answer may seem obvious: toughen antitrust law. That would indeed be welcome. But policymakers must also realise where they need to regulate less. Matthew Rognlie, now of Northwestern University, has shown that returns to capital have gone up in large part because investing in housing has been so lucrative. That has a lot to do with constraints on development near successful cities—a government barrier to entry. Messrs Gutiérrez and Philippon find evidence that concentration has risen most in industries that have become more regulated. America must promote more competition. But it should also remember that nobody has more power to rig an economy than the government.

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