Big Business Is Killing Innovation in the U.S. – The Atlantic

Big Business Is Killing Innovation in the U.S. – The Atlantic

Botanists define a rheophyte as an aquatic plant that thrives in swift-moving water. Coming from the Greek word rhéos, meaning a flow or stream, the term describes plants with wide roots and flexible stalks, well adapted to strong currents rather than a pond’s or pasture’s stillness. For most of the 20th century, U.S. lawmakers worked to maintain just these sorts of conditions for the U.S. economy—a dynamic system, briskly flowing, that forced firms to adapt to the unpredictable currents of the free market or be washed away.

In the past few decades, however, the economy has come to resemble something more like a stagnant pool. Entrepreneurship, as measured by the rate of new-business formation, has declined in each decade since the 1970s, and adults under 35 (a k a Millennials) are on track to be the least entrepreneurial generation on record.

This decline in dynamism has coincided with the rise of extraordinarily large and profitable firms that look discomfortingly like the monopolies and oligopolies of the 19th century. American strip malls and yellow pages used to brim with new small businesses. But today, in a lot where several mom-and-pop shops might once have opened, Walmart spawns another superstore. In almost every sector of the economy—including manufacturing, construction, retail, and the entire service sector—the big companies are getting bigger. The share of all businesses that are new firms, meanwhile, has fallen by 50 percent since 1978. According to the Roosevelt Institute, a liberal think tank dedicated to advancing the ideals of Franklin and Eleanor Roosevelt, “markets are now more concentrated and less competitive than at any point since the Gilded Age.”

To comprehend the scope of corporate consolidation, imagine a day in the life of a typical American and ask: How long does it take for her to interact with a market that isn’t nearly monopolized? She wakes up to browse the internet, access to which is sold through a local monopoly. She stocks up on food at a superstore such as Walmart, which owns a quarter of the grocery market. If she gets indigestion, she might go to a pharmacy, likely owned by one of three companies controlling 99 percent of that market. If she’s stressed and wants to relax outside the shadow of an oligopoly, she’ll have to stay away from ebooks, music, and beer; two companies control more than half of all sales in each of these markets. There is no escape—literally. She can try boarding an airplane, but four corporations control 80 percent of the seats on domestic flights.

Politicians from both parties publicly worship the solemn dignity of entrepreneurship and small businesses. But by the numbers, America has become the land of the big and the home of the consolidated.

This is a problem. But it is not an accident. The bigness of business is a result of federal policy, which, in the past three decades, has deliberately made it easier for large companies to dominate their markets, provided that they keep prices down. After years of sluggish wage growth and low levels of entrepreneurship, some people are starting to worry that America’s biggest companies are growing at the expense of the economy, even if they offer consumers good deals.

In the late 19th century, when the U.S. was beginning to develop into an industrial powerhouse, it was America’s first small-business owners—farmers—who initially pushed the government to intervene against trusts. They protested discriminatory shipping rates along rail lines, which were dominated by a handful of railroad magnates.

Congress passed the Sherman Antitrust Act of 1890 to break up the trusts and protect competitive markets, but it took decades for the law to serve this purpose. (In fact, in the 1890s, the railroads used the act’s language against their own workers, arguing that a labor-union strike amounted to an illegal “conspiracy to restrict trade.”) Several Supreme Court decisions ultimately stiffened U.S. antitrust law. Perhaps the most important decision came in 1911, when the Court ruled that Standard Oil Company of New Jersey’s ownership of nearly 90 percent of U.S. oil production violated the law.

The early antitrust reformers warned that even beyond its effect on prices, economic power could buy influence in Congress. Monopolies don’t just dominate their own industries, Justice Louis Brandeis said in 1933; they monopolize political power as well, which allows them to protect their incumbency and stifle competition in myriad ways. The trust-busting ethos gathered momentum; President Roosevelt transformed the antitrust division of the Justice Department from a tiny office of just over a dozen lawyers to a muscular force of nearly 500.

But in the late 1970s and early 1980s, several prominent conservatives succeeded in persuading Washington—especially the Justice Department—to abandon its old dogmas about big business. In a book that galvanized a movement, The Antitrust Paradox, Robert Bork argued that the government fetishized competition and often leveled the playing field for the benefit of poorly run companies. The book argued that by protecting bad companies for the sake of competition, the government was keeping prices higher than they would be if the most-efficient companies were allowed to dominate. The Justice Department’s rules on vertical and horizontal mergers were rewritten to make it easier for large companies to merge, as long as the new, larger business could deliver lower prices.

So antitrust law shifted over the course of the 20th century from principally protecting competition to principally protecting consumers. Today many reformers are calling for the pendulum to swing back.

In a speech at the nonpartisan think tank New America in June, Senator Elizabeth Warren said that rule changes inspired by Bork have, well, borked America’s competitive spirit. Corporations that grew through mergers weren’t the only targets of her criticism. She also called out technology giants such as Apple, Amazon, and Alphabet (the parent company of Google) for abusing their economic power. She accused Apple, for example, of using the iPhone to punish the music-streaming service Spotify and help its own equivalent product. “While Apple Music is readily accessible on everyone’s iPhone, Apple has placed conditions on its rivals that make it difficult for them to offer competing streaming services,” she said.

Warren’s main argument was that allowing companies to grow without fear of interference from the Justice Department has stilled the waters of American dynamism. “Left unchecked, concentration will destroy innovation,” she said, before listing other casualties: start-ups, small companies, the economic security of the middle class. “Left unchecked,” she concluded, “concentration will pervert our democracy into one more rigged game.”

Her clarion call has resonated with allies in Washington, not only for economic reasons, but also because, in an age of divided government, progressives are looking for an agenda that they can enact without groveling before a do-nothing Congress. The White House’s Council of Economic Advisers has published a lengthy report on the benefits of competition, and the Roosevelt Institute has called on the government to buff up its antitrust policy, in part by increasing scrutiny of how a potential merger would affect long-term competition and dynamism in the sector. Warren would like to see a renewed focus on companies that have grown large organically as well—for example, by getting the Federal Trade Commission to more fiercely fight anticompetitive behavior, such as Apple’s stonewalling of Spotify. All told, this would mean the most aggressive attempt to curb the growth of big business since the New Deal.

But how big can a company get before it’s inherently bad for the economy? The technology sector presents a thorny problem for antitrust reformers. Between too-big-to-fail banks and seemingly incompetent cable companies, there may be popular support for action against consolidated market power. But many of the companies in Warren’s crosshairs are beloved. The three most admired American companies are Apple, Alphabet, and Amazon, according to Fortune; Facebook is in the top 15 and rising fast. Our attention seems to be ever more focused on our phones, and Apple owns 40 percent of the U.S. smartphone market; between them, Google and Facebook collect more than half of all mobile-display advertising revenues. If mobile phones, software, and social networks eat the world, who decides how big the portions can be?

“I think this is the big policy question for this moment,” says Sabeel Rahman, a fellow at the Roosevelt Institute. “Where do we draw the line between ‘good’ bigness and ‘bad’ bigness?” The debate is more than a century old. In the 1930s, Brandeis argued that large companies would inevitably exploit their workers, convert their profits into political influence, and corrode both the market and the machinations of government. But the Reagan administration and subsequent lawmakers have allowed vertical and horizontal integration on the theory that economies of scale often benefit both employees and consumers.

The new antitrust crusaders are manning an old trench with fresh ammo. Brandeis was right, they argue, and the evidence of his rightness abounds: Citizens United has empowered business at the same time corporate profits have been hitting an all-time high; wages are stagnating at the same time stock buybacks and dividends soar; corporate mergers are spiking as entrepreneurship languishes; mom-and-pop stores are shuttering as corporate franchises fill the empty spaces.

For decades, Bork and his acolytes had the U.S. government convinced that competition was overrated. But perhaps capitalism needs churn like some aquatic plants need a current. The free market is rheophytic. Bigger is not always bad, but if we’ve learned anything in the past three decades, it’s that a little froth is always good.

http://www.theatlantic.com/magazine/archive/2016/10/americas-monopoly-problem/497549/

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