Monsters   /   Spring 2020   /    Book Reviews

The Means of Production

Tackling concentration and the lack of competition in the American economy.

Bradley Babendir

Walmart truck on the road; Zoonar/Michael Rosebrock/Alamy Stock Photo

The American economy feels clogged up. Fewer and fewer companies take up more and more space. Three new books—The Great Reversal by Thomas Philippon, United States v. Apple by Chris Sagers, and The People’s Republic of Walmart by Leigh Phillips and Michal Rozworski—tackle the issue of concentration and lack of competition in the American economy from different angles. Is it really happening? What do we do about it if it is? Could the great size of companies like Apple and Walmart actually be a good thing?

Philippon, a professor of finance at New York University who sits on the Monetary Policy Advisory Panel of the Federal Reserve Bank of New York, is the only one of these writers who treats the possibility of a crisis of anticompetition in the American economy as an open question. In his book’s conclusion, he writes that after extended study he was “surprised by how fragile free markets really are.” (Perhaps economists do not get outside much.) He elaborates that, in his view, “free markets are supposed to discipline private companies but today, many private companies have grown so dominant that they can get away with bad service, high prices, and deficient privacy safeguards.”

The Great Reversal is fair-minded, sometimes tediously so, exploring with great generosity a number of competing theories on the current curtailed state of competition. Philippon considers hypotheses such as “Industry concentration measures are meaningless because industry codes are too coarse and because markets are local” and “The Internet makes price comparisons easier, and this leads to winner-take-all outcomes.” The explanation for competitive decline to which he gives the most credence is the “Hypothesis of the Rise of Superstar Firms,” which posits that “concentration reflects the increasing productivity of industry leaders.” The seeming ubiquity of firms such as Amazon, Walmart, and Disney makes this feel true. They tend to be perceived as companies whose size was earned through logistical skill and innovation, and Philippon makes clear that in in the 1990s “the retail trade industry became substantially more concentrated and more productive.” As concentration subsequently increased, however, this stopped being true. “In fact,” Philippon writes, “between 2000 and 2015, we find a negative (but somewhat noisy) relationship between changes in concentration and changes in productivity.”

Philippon dismantles each of the hypotheses with a similar level of magnanimity and attention, leaving little doubt by the end of The Great Reversal that the American economy has become pervasively anticompetitive. However, he does not let himself or his colleagues off the hook, writing that “there is fairly strong evidence that economists fail to provide timely advice.” He slyly gives himself a bit of an out by mentioning that as early as 2008 he wrote a paper in which he observed that “finance had not actually become more efficient”; had his paper been published earlier than its eventual appearance in 2015, he avers, his work might have staved off the whole catastrophe.

Readers of The Great Reversal will rightly find that idea suspect. Philippon can be very convincing, but he writes with a narrow focus. Even after writing an entire book proving that concentration is detrimental in numerous ways, he opens his section “A Few Economic Principles for the Twenty-First Century” by conceding that “a market cannot be free if it does not exist, so a monopoly is certainly better than a ‘zeropoly.’” Philippon’s principles are general, and while there is little to disagree with, they amount practically to very little. He says there should be fewer regulations that raise the bar for market entry and tougher regulations on already-existing successful firms. On regulators, he notes:

We live in a world where we tolerate data breaches from our banks, credit card companies, social media companies, email servers, and credit scoring companies. But in this world the idea that a regulator might make a mistake is unacceptable When their cases are not perfect, regulators are pilloried in the press.

He writes this as if being “pilloried in the press” is the worst outcome one can imagine—yet the companies he is citing have been pilloried in just this fashion. Philippon makes a bad argument when he tries to claim hypocritical leeway in the direction of private companies while suggesting that we extend that same leeway to regulators.

To see why, consider the antitrust case at the center of Chris Sagers’s United States v. Apple. In this case, five major publishers—Penguin, Simon & Schuster, HarperCollins, Hachette, and Macmillan—were charged with colluding with Apple to drive up the price of e-books to the disadvantage of Amazon, which had a stranglehold on the market.

There was, as Sagers argues convincingly and emphatically, no real argument in defense of what the publisher defendants, in collusion with one another, and Apple, set out to do: They committed to sell books on Apple’s platform at a certain price and committed to not sell them at a lower price anywhere else. This was price fixing, plain and simple.

Sagers amply illustrates the incompetence with which this was attempted, but doesn’t seem interested in the reasons for it. At one point he asks why British authors opposed price-fixing schemes, even though, he says, without citing any examples, contemporary authors actually were in favor of such arrangements with Apple. Sagers also does not address how a price-fixing scheme might have harmed Amazon, why authors might have had an interest in disempowering Amazon, and why authors might fear Amazon’s totalizing monopoly. Instead, he accuses authors variously of being vain, cheap, even stupid:

Indeed, while most authors probably are disadvantaged financially—in the sense that they earn less than they might in a fully competitive market—it is not because of retail price competition, but because of the power of the publishers who set the terms of their compensation.

Publishers do more than simply distribute a book; so it is not unusual for them to negotiate an arrangement that is not necessarily to an author’s advantage. Although it would have been instructive to have analyzed the threat posed by Amazon to authors and others, Sagers demurs, declining to examine the effects of a company of Amazon’s power and size.

For example, Sagers might have mentioned Amazon’s nearest competitors when it entered the online bookselling market, sites such as Book Stacks, WordsWorth, and AbeBooks. As for the latter, he notes it is “a firm still in operation today,” but he does not add that it is owned by Amazon (and has been since 2008). On another occasion, he cites a claim made in a 2014 Vanity Fair article by Keith Gessen that profits had the potential to be higher under Amazon’s desired pricing structure. But Gessen’s article was also about Amazon’s use of its market share to choke Hachette by refusing to sell some of Hachette’s titles on the Amazon platform and thus, in the process, retaliate against authors who published with Hachette. Hoping to emphasize the fecklessness of the defendants, Sagers fails to reckon with Amazon’s power with any real verve.

The People’s Republic of Walmart doesn’t make these same mistakes. Phillips and Rozworski, both socialist writers and thinkers, are attuned to the callousness that undergirds the hegemony of the companies analyzed only in economic and legal terms in the other two books. In the introduction, the authors write, “Let us be clear from the outset, Walmart is an execrable, sinister, low-down dirty villain of a company.” Later, they add that “few other corporations seem to carry out their worker-immiserating, anti-union practices with quite such zeal, such crushing mastery.” The premise of their book—out of reach for Philippon and Sagers, who revere the free market—is the possibility that the vast logistical power of Walmart and Amazon can be reoriented for the public good and repurposed as a model for effective centralized planning.

When people imagine a centralized nonmarket economy, they usually conjure up fears of dystopic Stalinist uniformity, but Phillips and Rozworski instead depict how Walmart and Amazon have mastered the capture of customer data to predict demand. While Walmart is outwardly successful in an open market, the authors explain that internally, operations are conducted in more of a closed system:

The different departments, stores, trucks, and suppliers do not compete against each other in a market; everything is coordinated. Walmart is not merely a planned economy, but a planned economy on the scale of the USSR smack in the middle of the Cold War. (In 1970, Soviet GDP clocked in at about $800 billion in today’s money, then the second-largest economy in the world; Walmart’s 2017 revenue was $485 billion.)

There is a lot of speculation about how this works—we can see the results, but we can’t see how they were produced. Phillips and Rozworski don’t have access to the proprietary information that would allow them to move beyond theories.

The same is true of Amazon, a company whose “horrible working conditions, low taxes, and poor wages” have been widely exposed in the media. Phillips and Rozworski praise the company for techniques such as “load balancing,” in which “Amazon decides where to build its massive warehouses and how to distribute products between them to make sure no part of its system gets overloaded.” The mere existence of this planned network is perhaps evidence that a centralized system could work, but without a detailed answer to the question of how it works, the argument is incomplete.

The People’s Republic of Walmart is, however, not a guidebook for running a successful centrally planned economy; it merely makes the point that such an economy is possible. On this score, the authors prove the theory effectively enough. Whether or not that is a desirable future will depend on one’s ideology. Much like The Great Reversal and United States v. Apple, both of which maintain that the desired outcome is better-managed capitalism, The People’s Republic of Walmart is geared toward those who prefer Scandinavian-style social democracy. Because Phillips and Rozworski don’t grapple with economic data in the same way Philippon does, their book has no response to the latter’s argument that large firms have become increasingly inefficient over the last two decades. Further, while Phillips and Rozworski focus on the logistical marvel of Walmart and Amazon, they don’t address how this has been achieved in a market economy, nor consider what the oppressive conditions of these two companies’ workers mean in a nonmarket context.

Despite their different approaches, all three books clearly demonstrate that the status quo cannot persist if the economy is going to work better for more people. Energetic antitrust enforcement, Philippon and Sagers agree, is a great step in the right direction. Phillips and Rozworski, on the other hand, would rather see market giants like Walmart and Amazon seized, broken up, and put to use for the good of the people. Of course, nobody has any idea what would have to be done to get us to either of these outcomes. And nobody feels much responsibility to admit this. Still, the first step is diagnosing the problem, and the second is offering some solutions. Where to go from there is our problem.