Is the Price Right? Two Nobel Laureates Debate How Markets Work
Revisiting a conversation between Eugene F. Fama and Richard H. Thaler on the efficiency of financial markets.Is the Price Right? Two Nobel Laureates Debate How Markets Work
On this episode of the Capitalisn’t podcast, hosts Luigi Zingales and Bethany McLean discuss how and why antitrust enforcement has waned in the United States in recent decades. Recent research from Zingales and his coauthors uses data around public demand, Supreme Court nominations, State of the Union speeches, and more to reveal that the key driver behind declining enforcement wasn’t the Chicago School of Economics, but rather, special interests. Luigi and Bethany chart this story right from the beginning and consider its lessons for today, ways to change the current state of affairs, and most importantly, why antitrust matters.
Luigi: Bethany, how many times have we discussed in this podcast that one of the causes of today’s problems is a lack of antitrust enforcement?
Bethany: A lot. In fact, sometimes I think we could probably rename the show Antitrust-Isn’t. People do blame a lot of our current problems on this history of ever-decreasing antitrust enforcement, and there’s a very distinct narrative as to how that came to be.
Luigi: The popular narrative is that it’s all our fault. No, the popular narrative is that in the ’70s, a group of economists at the University of Chicago pushed an alternative view of antitrust that reduced enforcement, and we have not recovered ever since.
Bethany: Chicago as the epicenter of evil. Interesting. But, yes, definitely. That’s how I would have told the story if I were writing it. I would have summed it up in a sentence. Is that story not right?
Luigi: First of all, ironically, this is a very anti-Chicago story. Chicago is very much about political economy, that everything is forced by big economic interests and not necessarily the world of ideas. The only time where this view is broken is for this particular case, in which it seems that the right ideas prevail and change the world. I think it is actually much more nuanced than that.
Bethany: Well, one of the things I love as a journalist is a rewrite of a conventional narrative or a way in which that which we all believed to be true is not quite true. Let’s talk about it.
I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: Some of our listeners may have forgotten that you’re not just an economics podcaster. You actually do more than cohost this podcast with me. You do happen to write academic papers from time to time. Tell me about this most recent one.
Luigi: There is nothing so sweet for an academic nut like me as hearing somebody asking about his latest paper. It’s basically, for a parent, like asking about your children. You’re going on and on and on until somebody says, “Please, stop it.” So, I trust you to stop me when I become obnoxious.
First of all, this is a joint work with Filippo Lancieri. He’s a recent graduate from the JD program at the University of Chicago, and my colleague at the law school, Eric Posner, who also happens to be the son of one of the key figures in the Chicago School, Richard Posner. I think there is also an interesting narrative there, but I will leave it to you to unfold it.
The idea is very simple. We wanted to understand not only why the views of the enforcement of antitrust changed in the mid-’70s, but to what extent these views have persisted so long over time. Because there is no doubt that Chicago economists did come up with some new ideas in the mid-’70s—new even by Chicago standards, in the sense that the Chicago School, as we know, in the ’40s and ’50s was very much in favor of antitrust enforcement.
Very few people know this, but George Stigler, in 1952, wrote a piece where he said that you should break up big companies, and this is not only the right thing to do; it is also the conservative thing to do. You might say, “Wait a minute, what is conservative about breaking up the company?” But he was very consistent. He said, “No, because if you don’t break them up because they’re so dangerous, then you need to regulate them massively, and regulation is much worse. So, I think that if you want to preserve a free-market economy, you should really break them up and then let them compete like everybody else.”
Bethany: Before we get to your points about this, just explain why antitrust matters and how it worked up until these changes began to take place.
Luigi: As economists, we think that markets have nice properties in terms of efficiency in allocation of resources, under some set of conditions. And condition number one is that firms don’t have any market power. In the desire to maintain a competitive market, the ’50s and ’60s were years of pretty aggressive antitrust enforcement. For example, IBM was sued by the DOJ for more than a decade, and so was AT&T. Eventually, AT&T was broken up.
So, there was very strong antitrust enforcement, but sometimes it wasn’t clear what the goal of this enforcement was. Is it to benefit consumers—higher quality and lower prices—or is it to benefit competitors? Chicago came down very clearly saying, “We should protect consumers. We should not protect competitors, because the role of a capitalist system is to select more efficient firms. If we kill the selection process, we kill much of the benefits of the capitalist system.”
Bethany: You had some pretty compelling statistics in your paper that mark the end of this aggressive belief in antitrust enforcement. Before we get to why that happened, just tell me some of the ways in which you’ve measured it in your paper so that we can see it.
Luigi: Just to give you a sense, the Department of Justice used to bring, on average, 21 cases per year against Fortune 500 companies. After the 1980s, this number drops to six. Between 1955 and 1979, the DOJ brought 221 cases for monopolization, exclusionary practice, and vertical restriction. Between 1980 and 1997, this number fell to 22, so one-tenth of what it was before.
In the United States, antitrust enforcement can be brought by the Department of Justice, or it can be brought by the Federal Trade Commission. There are fewer studies on FTC enforcement. Still, the average number of FTC complaints fell from an average of 18 a year between 1961 and 1971 to nine a year between 1980 and 2003. The fascinating thing is that this took place, at least on the face of it, without any sanctioning by Congress or by any elected official.
So, the question is, is it really true that a few experts changed the world in such an irreversible way or hard-to-reverse way? If this is true in antitrust, can it take place everywhere else?
Also, if these experts have so much power, why do they have so much power, and why was there so much power in this area but not in every area? If we wanted to change taxation, I don’t think we would see that a few experts have all this power. I think that’s basically what motivated me, this interest of the relationship between experts and democracy.
Bethany: There wasn’t a University of Chicago economics professor who went to Washington, DC, and took on a big role and convinced the government that this was what we should do, for reasons of efficiency, to decrease antitrust enforcement? It happened, for lack of a better word, in a more shadowy way than that?
Luigi: Definitely. I don’t think that any big Chicago professor became head of the DOJ or the FTC or even head of the Council of Economic Advisors. In fact, the joke I heard is that when Stigler won the Nobel Prize in 1982, and Reagan was elected president, like every Nobel Prize winner, he’s received at the White House, and George Stigler made a negative comment about Reagan’s economics and what was called at the time Reaganomics. He was basically pretty quickly ushered out of the door.
Bethany: Another place to start: did the mood of the country change? Did the mood of the country suddenly decide . . . Did it become a populist idea that business would be better if it were bigger? Did that happen? Or was antitrust enforcement actually relatively popular among the population at large?
Luigi: This is a fascinating aspect. because in a democracy, we care about the fact that decisions reflect the will of the people and not the will of special interests. If anything, the trust of average Americans toward large corporations has gone down over time, not up. This is not just a recent phenomenon with the big digital platforms. We have in the paper a graph showing that you have a consistent drift down.
The other thing that we did is we looked at the electoral platforms and the presidential speeches that were given. You don’t find any evidence of a rallying against antitrust. There is no sense that the public gave a mandate to whoever was in power to dismantle antitrust.
In fact, one interesting factoid, thanks, actually, to the American Liberty Project, who went through the Reagan archive, they passed us some documents they found in the Reagan library. One of these documents is written by George Stigler and Richard Posner, father of Eric Posner. And in this memo, they basically updated the transition team of the Reagan administration about the fact that the recent economic literature is saying that, basically, bigger is better. I simplify, but that’s roughly what they say. And they say, “Look, we think you can implement these changes.” Again, I simplified it a bit, but through administrative procedures, avoiding the potential risk of taking them to Congress.
It is pretty clear from some of the advisors . . . Now, there is no evidence that this memo was read by Reagan or that it played a big role in Reagan’s decisions, et cetera, but it is certainly consistent with the fact that even the people who wanted to implement this change understood that this change was not popular. They thought it was the right thing to do, because recent economic theory suggested it was the right thing to do.
Bethany: And let’s pause on that. Is that why they thought it was the right thing to do? We have this view of academics, even economists—although you and I have touched on a few times why perhaps this shouldn’t be the case—but as people in ivory towers who argue from the perspective of pure intellectual belief, untainted by commercial possibilities. Was that actually what Posner and Stigler believed, or were they already being influenced by big business in ways either subconscious or conscious?
Luigi: I think that’s hard, of course, to tell. What I can tell you is that what I think changed the Chicago perspective in the ’60s was actually work by Harold Demsetz, who was a professor at Chicago for many years and then moved to UCLA and, actually, recently passed away. He had the clever idea to say, look, it is not that markets that are more concentrated are more profitable. It’s the other way around. More profitable firms, which are more efficient, grow more and so gain more market share. And, as a result, they get larger. They create, in practice, this correlation between concentration and profitability.
But that’s not a causal relationship like the previous paradigm, structure conduct performance, was suggesting. It was simply a previous correlation driven by an underlying element, the efficiency of the firms themselves.
Bethany: That’s interesting. Is part of the problem that there was this ideological incoherence in antitrust enforcement, such that an alternative was palatable because it seemed simpler? And then, if the alternative became this idea of, “If it’s a lower price for the consumer, then all good, everybody’s happy now,” which is still a problem today, is that because it did appear to be such a clear, clean answer, in contrast to the incoherence that had come before?
Luigi: But this is where the interesting twist comes. It was a clean answer that also benefited big business tremendously. That is what gave a disproportionate play to this answer, both in terms of how fast it caught on and also how long it lasted in the public domain. The Chicago view was dominant in the late ’70s, but by the mid-’80s, a new sort of thinking came about, mostly based on game theory, where you do see potential distortion of competition, et cetera. And what is interesting is that this new thinking really did not trickle down very effectively into the practice of the law, and maybe not even fully now.
Bethany: Let me clarify. What you’re saying is that there were attempts to challenge this new point of view on antitrust enforcement, and there were attempts to say, “Hmm, maybe this isn’t the way to go,” but they just never really caught on or trickled down into the practice? The practice continued to be what was actually happening in the courts, with the continued weakening of antitrust enforcement, despite efforts to challenge the underlying ideology.
Luigi: I would say more than there were attempts, I think there were successes . . . From an academic point of view, these views were attacked successfully, but that success did not translate into a success in the jurisprudence and into practice.
Bethany: Let’s talk about how that happened. You have this line in your paper that I found frightening, both in the specific detail that you’re talking about, but also more broadly speaking. You write, “The decline was engineered by unelected regulators and judges who, with a few exceptions, did not express skepticism about antitrust law in confirmation hearings.” And how I interpret that is that, as you’ve said, this decline in antitrust enforcement, it wasn’t the will of the people, it wasn’t even done explicitly by an elected official. It was done very un-explicitly, and by people who knew enough not to even admit what they were going to do. Just talk about how that happened. Who were these unelected regulators and judges?
Luigi: Let me give a leading example. David Souter. David Souter was a Supreme Court Justice. In the nomination hearings, he said very clearly that he believed in very strong antitrust enforcement, that he wanted to protect small business in America, that he thought that this was important to the fabric of American business. But then, when you look at his record, he basically constantly voted in favor of less antitrust enforcement, of large corporations over small corporations. He has the most probusiness record of all the Supreme Court Justices. And in the paper, we have some pictures that show that very clearly . . . A lot of these Justices move, if you want to call it to the right, or to the probusiness side, very steadily and constantly. And even Justices who are considered leftists, like Ruth Bader Ginsburg, who is considered this icon of the liberals, she was remarkably probusiness, against antitrust enforcement.
Bethany: Wow, I did not realize that, and I think I might have to go back and look at RBG’s legacy through that lens. It actually is interesting, and this is a bit of a tangent—except it isn’t, really, because antitrust enforcement can seem wonky and like it doesn’t really matter, and maybe you have to be a lawyer or an expert to understand it . . . It’s interesting that in all that’s been said about RBG since her death, nobody has even looked at this, as to what her record was on business. And I often think that our belief that things are wonky, that they’re business-y, that they’re whatever, serves as a very effective shield, so that we don’t even look at these things. But that’s a little bit of an aside.
But then, how did that happen? Who was pushing this agenda? Was it just in the water that this is what big business believed, and so you can’t necessarily trace it to a specific lobbying effort? Or were there actually specific efforts to get judges elected and to push this idea of economic efficiency because big is better?
Luigi: So, it might sound a bit conspiratorial, but in this case, there is a document, there is a person, there is a strategy, and the strategy is followed. So, this document is called the Powell Memorandum. Now, Lewis Powell was a very successful corporate lawyer from Virginia who, in 1971, was hired by the American Chamber of Commerce to give an opinion about what the American Chamber of Commerce could do to fight, basically, Naderism and all the leftist theories that developed in the 1960s.
He wrote this memo saying that the American enterprise system is under severe attack by leftist ideology. And in order to fight it, we need to operate in three directions, and I use my words, not his, but capture academics. In particular, the first places to capture are graduate schools of business. The second, basically, be more influential in Congress by using money to have a higher influence on the legislative process.
And the third one is to capture the Supreme Court and capture it in two ways. One, by nominating the right people and, two, by actually bringing the right cases to the court so that they can be pushed in a particular direction.
Now, what is funny—up to a point—he wrote these things in 1971, and in 1972, Nixon appointed him to the Supreme Court. And as Supreme Court Justice, he started to change all the regulations on campaign financing that eventually led to Citizens United. So, the Citizens United decision in 2010 was based on two previous decisions. Both of these decisions really start to say that money is freedom and that corporations should have the ability to intervene in political elections and should not be limited in the amount of money they contribute. Not to particular candidates, because there could be a quid pro quo, but in advocating for positions.
Bethany: So, obviously, Citizens United and the ability of big business to lobby relatively unfettered for what they want is a really big deal and plays into the lack of antitrust enforcement. But there’s also another way in which you can see Powell’s ideas sprout, right? In the sense that you have all this data in your paper about how things changed, about lobbying activity, about mergers, about lawyers approving patents for law firms that will later employ them. What did you find that was the most compelling evidence of this shift, of the ways in which big business sort of followed Powell’s directive—that’s a little too strong a word—but followed the urging of the Powell Memorandum and began to really influence things going forward?
Luigi: Actually, I always like to see the people themselves talk at the time. And in 1997, at the retirement party of the chairman of the American Chamber of Commerce, somebody gave a speech, and the chairman was celebrated exactly for having implemented the Powell Memorandum. When Powell writes his memo, he says that basically no businessman has any influence in Washington. By 1997, this guy that writes the celebration speech says explicitly, “Now, we changed the agenda in Washington, and we don’t talk anymore about antibusiness things. We talk about lower taxes, lower regulation, so that’s the biggest victory.” So, I think that to me is kind of the smoking gun, because they say it themselves with their own words, right?
Bethany: It is the smoking gun. Let me go back to Powell and who he was. Did he mean to advantage big business, or did he genuinely believe, like, perhaps, Posner, that this was the right way to go? That big was more efficient and that he was benefiting the country and making America stronger, somehow benefiting consumers by doing this. Was there a component of belief to all of this and to what happened? Or was it all done with the explicit goal of aiding big business?
Luigi: So, first of all, Powell was a legal scholar, a lawyer, not an economist. So, he wasn’t particularly focused on official big business. Second, he was a corporate lawyer. Now, you know better than I, that if your livelihood depends on helping large corporations, you like large corporations. So, I don’t think that there was any doubt that he was a big supporter of big business, but I will add another element, which I think that the younger crowd here might completely miss, and it is going back to the world of the early ’70s.
In the early ’70s, massive regulation was introduced. A Republican president named Nixon introduced the Environmental Protection Agency and OSHA, which is basically protection for workers on the job site. So, there was a period of massive regulation, and there was a legitimate concern from him and from a lot of businesspeople that the United States might become a socialist country. I know that is hard to believe today, but I don’t think it was out of the question back then. And that’s the rallying cry, the patriotism. He really says the American enterprise system is under attack.
While I don’t remember the Powell Memorandum, I do remember the ’70s in Italy, and Italy is always a little bit behind in everything, and the ’70s were very, very scary years when you had the Red Brigades, and the possibility of a communist revolution was not out of the question.
Bethany: So, in this point of view, the Chicago way of thinking was almost unwitting pawns in the hands of big business or in the hands of, I love this, the investment-bank-industrial complex. I think we’ve coined something amazing.
Luigi: Yes, absolutely. That’s a fair characterization.
Bethany: Were the immediate ramifications of the change in the level of aggressiveness of antitrust enforcement . . . How quickly did we start to see the effects, and were there any positives, or were they all negative?
Luigi: There was a wave in the late ’60s that is called the conglomerate-merger wave, because companies were buying companies in a different line of business, and one of the stories is that they were buying the different lines of business because the antitrust regulators were not letting them buy in the same line of business.
Immediately, in the 1980s, you see a lot of mergers, also a lot of deconglomeration. So, you saw people like KKR buying Beatrice Foods, which was a conglomerate, selling everything from Tropicana juice to Samsonite luggage. They broke Beatrice Foods apart and started to sell every line of business to other businesses in the same line of business and made a fortune. That’s, I think, the first immediate reaction—
Bethany: Can I chime in quickly with one thing there?
Bethany: I actually have a new theory of this entire thing, which is that everything in the world has been done to benefit M&A lawyers, because they put this stuff together, and then they were incentivized to take it apart, and then they’re incentivized to put it together in a different way, and then they’re incentivized to take it apart in a different way. I’m totally joking. Let’s go back to your . . . Well, I’m not totally joking. I’m partially joking.
Luigi: I always say that there is an element of truth in every joke, and certainly, this is not an exception to that.
My interpretation is, Chicago was definitely right at the time. However, this has been really exploited by M&A concentration, and so on, so forth. For that group, the Chicago view of antitrust was music to their ears, and they wanted to play the music for 40 years. They were very resistant to start listening that maybe you need to change the music because the context has changed.
Bethany: What was your major takeaway from this paper? And are there lessons that it holds for us today?
Luigi: Yes. My learning experience throughout the paper has been how much we live in a very different world than we lived in 50 years ago. It’s very hard, especially for young people, to understand the ’70s. If you look at the number of government agencies that were approved during the ’70s, it is unbelievable. You start with the EPA in the 1970s, then you have OSHA, which is for worker protection, then you have one for mine protection, for highway protection. Every year, there were one or two agencies being created.
Now, you understand why, at the end of the ’70s, Reagan won the election launching deregulation, because people were a little bit overwhelmed with this quantity. So, in my view, there is no doubt that the pendulum had shifted too much in one direction back then.
And what I found interesting before we started studying this—I don’t think the answer was clear—is why the shift back has been so persistent. As is often the case, it is a combination of vested interests and ideas, but I think that what is important to understand is that ideas can be a very good way for dispersed interests to coordinate. And at the same time, it is also a very good foil for vested interests to fund. It’s very hard to fight to make the rich people richer, so you need to have a legitimate cause. And when that cause is legitimate, then you can be much more successful in that lobbying.
Bethany: If you had to pick, if there were a situation again where something had clearly gone too far, the pendulum had swung too far in the opposite direction and it was hurting our world, would you rather see vested interests change that, if the change was for the better, or would you rather see it remain unchanged, if our democracy was incapable of functioning in a way that changed it that way?
Luigi: First of all, I don’t think that today we would be in a position where something that disadvantaged vested interests had gone too far. That’s part of the problem.
Bethany: That’s probably fair.
Luigi: The only thing that is going too far is what favors vested interests. And the answer, unfortunately, is that it ain’t easy to change. We have seen how excited the Democrats were when they won the election that within six months, we would have a new antitrust law. Now, we are going on two years, and no law has passed Congress, not even the simplest one. What I discovered is that the Supreme Court, in 2021, basically eliminated the ability of the FTC to ask for monetary damages, which is basically half-neutering the FTC.
It would be like a one-line bill in Congress saying, “Oh, now we add the power to the FTC to ask for monetary damages, period.” That’s a one-line bill, OK? They were not even able to pass that. And why? Because you say, “Wait a minute, the Democrats say that they’re in favor and they have a majority. Why can’t they do it?”
And the answer is, they don’t have the majority on this topic, and in spite of the fact that some Republicans are willing to vote with them, there are enough Democrats that are captured by either Silicon Valley or large companies, et cetera, that they don’t find the will to do it.
Bethany: That’s fascinating. And I actually didn’t know that. I think, based on what I’ve read, I still would have believed that we were living in a world where antitrust enforcement was going to start ticking up any day now. And we’ve seen little signs of it, but I just kept thinking there was going to be more, and I didn’t realize, which I should have, that there were things moving behind the scenes that were going to make that difficult.
Luigi: Unfortunately, yes, and I’m not holding my breath, because now there will be midterm elections, and then after the midterm elections, who knows? But I think there is basically the people’s will but not the party’s will. And what is the difference? Money.
Bethany: That is very, very, very well said.
Do you think, if you had to bet, would you bet that antitrust enforcement is going to start to increase again? And if it did, how big a change would be there be in our current world?
Luigi: First of all, I don’t think this is going to happen. I think there will be things on the margin, but I don’t think there will be a major change, because the change that was made has been very, do you say in English . . . very little by little and very sophisticated. So, it’s not something that you can come in . . . and a lot of it has to do with decisions of the Supreme Court. And if you want to undo those, good luck. Maybe our grandchildren will see hope there. I don’t see that happening. And if this were to happen, then the question is, is this just a tech bill, or is this more broadly an antitrust bill for all the sectors?
Bethany: So, before we end this, you had mentioned at the very beginning that there was a story involving the Posners, given that one Posner was the author of a paper that helped create some of these dynamics, and the son is one of the coauthors on your paper. And you’d mentioned that there was some sort of story, and since I’m a journalist, I love stories involving people.
Luigi: I was a colleague for many years with the father. The father was much more of a complex figure than people made him out to be. Actually, I interviewed him once in 2017. In the middle of the interview, he said, “Oh, when I wrote the Philadelphia National Bank Supreme Court decision.”
And you know the moment, I’m sure you have them, when you’re moderating a panel, somebody says something, you say, “Wait a minute, am I spacing out? How is that possible?”
And that was one of my moments. I said, “How the heck is it possible that . . .” First of all, he was never a Supreme Court Justice to begin with. But second, even if he’s old, he wasn’t that old to be a Supreme Court Justice in 1963 because that’s the . . . oh, ’64 . . . anyway, a long time ago. Only later, I realized that he was a clerk for the Justice in that decision, and he did something that I understand is a faux pas, but when you reach a certain age, you kind of say whatever you want. So, beware of me when I get old, because I’m already bad now and, then when I’m older, I’ll be unbearable.
But anyway, he actually wrote that decision, which was very, very conservative with a small “c,” an old-fashioned decision, very much in the mold of structure conduct performance, and in the mold of strong antitrust enforcement. In fact, the merger between two Philadelphia banks was struck down. So, a young Richard Posner, fresh out of law school, going to a clerkship, is very much trained in the old mold.
Then he joined the University of Chicago, I think in the late ’60s, and he basically absorbed the Chicago view of things, and for many, many years, writes a lot of opinions and a lot of books in that mold.
By the financial crisis, he actually changes. I got to interact with him around that time, because he wanted somebody to read his book, and I read his book, et cetera.
He has a kind of book that is almost Neo-Keynesian, if you want, immediately after the financial crisis. So much so, that some of the old guard at Chicago, the traditionalists, saw him as a betrayer of the faith. But I think what he is, is really a good scholar that when the facts change, he changes. And one of the last times I spoke with him, he said that the lack of enforcement of antitrust went too far.
So, I don’t see Eric... First of all, Eric is his own intellectual, but I don’t see him as betraying the memory of his father. I think he’s maybe continuing in the evolution, because that’s what good scholarship is about, that you keep learning and changing your mind. If you never change your mind, you must not be thinking hard enough.
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