Capitalisn’t: Why Do We Have High Prices but Stagnating Wages?

Jan Eeckhout: If you can work at Facebook or Google, it’s great. If you’re at headquarters, it’s wonderful. The thing is, headquarters, in the big scheme of things, is tiny compared to the fact that Google and Facebook and Apple and whoever, Inditex, AB InBev, you name it, what these companies have in the economy globally.

Bethany: 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: So, one of the questions that interests us at Capitalisn’t, and interests all of us in the world, is why workers’ wages haven’t increased significantly. Wages have actually stagnated since the 1980s except at the very top, and the labor share, the part of the national income that’s allocated to wages, has significantly declined. And yet, during this period, workers have become much more productive, and corporate profits have been soaring. So, what’s going wrong? Why aren’t wages rising?

Economist Jan Eeckhout has a new book out called The Profit Paradox, in which he attempts to explore this question, come up with some answers for what it is that’s going wrong, and what the solutions might be.

Luigi: His main argument is that many of the problems labor is facing are due to the fact that monopoly leads firms to produce less, and they produce less precisely to make more profits. Because if they were to increase quantity, prices would decrease, and their profits would go down. And so, they restrain production in order to keep the prices up. They make a lot of profits, but as a result, they produce less, they employ less, they pay fewer people.

Bethany: So, Jan’s argument is that because companies have market power, because we have these very market-dominant firms, the market power means that they can have high prices. Because of high prices, they produce less goods; because they can produce less goods, they have less demand for labor.

I don’t know, Luigi, I wasn’t quite sure that that tracked for me. I get it in a pure economist point of view. It doesn’t seem to me that that’s actually what’s happening in the market. For example, would there be more iPhones being produced if Apple were less powerful than it is? Think about Amazon, for instance, which has made its touchstone bringing consumers really, really low prices. Would there be more demand for Amazon’s services, and therefore, more jobs for workers, if Amazon had even lower prices? So, I think he’s getting at a really important problem. The diagnosis to me didn’t always correlate with what I observe in the real world.

Luigi: I will distinguish, because I think the Apple case is pretty clear. If Apple phones cost half of what they cost today, many more people would have Apple phones, and there would be more demand. Now, you might ask, the Apple phone is not produced in the United States, so maybe the demand for labor would not be in the United States. But imagine a world in which it is manufactured in the United States. There would be many more people employed in producing Apple phones. And even thinking about Apple producing in China, still, if there were twice as many Apple phones sold, then you would have many more employed, selling Apple, servicing Apple in the United States, so I think the demand would definitely be higher for labor.

Amazon is an interesting case, because the challenge with Amazon is not that they charge noncompetitive prices. In fact, it’s quite the opposite, they charge prices that are so low that some suppliers cannot survive. In a different way, maybe the workers of the suppliers of Amazon get affected as a result of the downward pressure applied by Amazon.

The simpler way to see his point is to think about the case of Apple, or to be fair, think about the case of other companies that have some market power; think about Coke or Pepsi. If Coke did not have a monopoly on the formula of Coke, there would be more Coke produced. Now, we might discuss whether this would be good or bad for the country overall, but certainly there would be more production of Coke in the United States and more employment of people producing and distributing Coke. So, I think in that case, it’s definitely the case.

And I think that in many sectors . . . We can go to sectors where staff are much more important, like dialysis. One of my colleagues has written a very interesting paper about the impact of mergers in the market for dialysis, the effect that they produce. It’s not only the effect of prices, it’s an effect of availability, and there are people who die because they can’t reach dialysis easily enough, because consolidation brought a reduction in the number of points where you can get your dialysis, and prices went up. So, the big, big part of the agenda is the entire pharmaceutical and healthcare sector, where we know that prices are astronomical, and not only are they astronomical, they keep going up.

Bethany: I understand your point about Apple. If prices were lower, there would be more demand, there would be more need for workers. But why would that necessarily translate into higher wages for workers? And I know, I know, supply and demand. But it just seems to me that in a world awash with labor, that it might translate into more jobs for people but wouldn’t necessarily address the wage issue.

Luigi: Let me try to explain with, actually, some work that a former student of mine, Simcha Barkai, did. You have probably heard repeated all the time that the share that labor is taking of national income has gone down. Everybody is saying, “Oh, if the share of labor has gone down, it must be that the share of capital has gone up.” Now, this is true only in a competitive world, because in a competitive world, you remunerate two factors, labor and capital, and profits are zero. And so, that’s the end of the story. In a noncompetitive world, you need to figure out that there is a share of capital, there’s a share of labor, and then the leftover is the share of profits.

What Simcha does is that he shows that not only has the share of labor gone down, also, the share of return to capital has gone down, and the leftover, the share of profits, has gone up. Now, these profits are, most of the time, appropriated by the owner of capital. So, from a practical point of view, you don’t see much of a difference between the two interpretations. But from a sustained point of view, it’s an enormous difference.

Why? Because in a world in which the return to capital has gone up, you will see people investing like crazy. If I know that I can get twice the money I invest, I will invest like crazy. In a world in which the share of profits has gone up, by putting in more capital, not only do you not necessarily get more profit, you might actually get less profit, because you are increasing quantity, and that leads to a decrease in prices.

And so, what he documents is that over the last 20 years, the share of profits has gone up and at the expense of the share of labor. So, think of the world in which you remunerate capital based on the risk of a project, and then the rest is either labor share or profit shares. If profits get more, labor gets less and vice versa. And that’s the world we live in.

Bethany: So, we wanted to bring Jan in to talk to him about this relationship between market power, an observed phenomenon that we all see, and the supposed free-market capitalism that exists in the United States.

It’s a bit ironic, the United States is supposed to have the freest markets in all the world, and yet this problem of market power appears to be most concentrated in the United States. In this new world we’re in, is there some kind of actual contradiction between free markets and market power? Does the embrace of one inherently lead to the rise of the second?

Jan Eeckhout: There is a close link between, I would say, capitalism and market power in the following sense. But before I say this, I don’t think it’s just a United States versus Europe issue, because it’s as much here in Europe. I mean, I’m holding a cell phone, it’s an iPhone, so it’s full of market power. Everything we do is overpriced, everything that we use is overpriced products, so it’s not just a United States versus the rest of the world thing, it’s a global phenomenon.

Now, when you say, “Is that a problem with capitalism?” I think capitalism works very well when we know the conditions for well-functioning markets are holding. Now, fast technological change is basically a situation in which these conditions, typically, do not hold. Or technologies with network effects, with high fixed costs, upfront investments, with high R&D costs up front, these are not the standard, typical sectors, situations that going to give you competitive outcomes. And so, capitalism is wonderful while we ensure that the conditions for competitive pricing are met.

And when they’re not, well, I think we only have one option. We have the option of regulating that, and that’s why we have had antitrust. By the way, this is not a new thing. I mean, the investment in railways, oil, phone and telegraph, all these new technologies, generated the same type of economies of scale that allowed some firms to dominate their markets, and it gave rise as a political reaction to quite a bit of the antitrust legislation that we know now. I mean, the Sherman Act is from that period. Most of the antitrust regulation is from that period.

What I believe is the case is that, politically, there is a tendency to equate promarket with probusiness, and I think there’s a huge difference. I mean, you guys are called like that, but being probusiness means, let’s allow these firms to build nice moats around their castles, as Warren Buffett would say. Allow them to build such market power because, I mean, it generates high profits, so basically, business is doing well, so the economy’s doing well.

And that’s what I think is precisely the paradox that if the economy is doing well, measured by the stock market, we have to be a little bit careful. Because the stock market is a measure of profitability of firms, and if this is all driven by innovation and new technologies and competitive markets, then this is great. But if instead we see that the stock market is booming because there’s a few firms who dominate, who are extracting rents from customers because they have market power, then this is really a bad sign for the economy.

Bethany: Another connection you draw is that this hasn’t been good for workers, and that’s not something that’s obvious to me. Why is that? OK, I’m going to be a naive idealist here. You’d think a big company earns lots of money, it has tons of profits, its profits are protected, it can do really good things for its workers. Why doesn’t it work that way?

Jan Eeckhout: It works in part like that, because if you can work at Facebook or Google, it’s great. If you’re at headquarters, it’s wonderful. The thing is, headquarters, in the big scheme of things, is tiny compared to the fact that Google and Facebook and Apple and whoever, Inditex, AB InBev, you name it, what these companies have on the economy globally. Basically, it’s an effect that says you have enough firms that have dominance, that have, through their pricing of their output goods, affect what happens to the demand for labor, and that lowers the wages.

What happens if you sell an iPhone for $1,200, and the cost is $350? Well, if they had sold it for $400 in a competitive market, they would have produced maybe two times, three times as many. Instead of two billion iPhones, we would have four or six billion iPhones. What that means is that you’re going to basically have to produce more. If you have to produce more, that means that somehow you need more labor. I know that these devices are now produced in factories with robots, but we have a lot of services attached to this. What that means is that we have, basically, a lot less demand for labor, because there are just fewer units sold at these higher prices. If the demand for labor goes down, prices, i.e., wages, go down.

And so, that is the connection that we find. The wage stagnation that we’ve seen since the 1980s can be linked to the rise in this market power, and it goes hand in hand. And so, this is not coming because just Facebook is exerting market power, it’s coming because Facebook, AB InBev, Google, Inditex, whatever set of companies that are at the top of the food chain in terms of dominance, what they’re doing jointly has an equilibrium effect on wages.

This is now something that I think, legally, basically saying that there’s nothing really that you can do immediately, because it’s like dealing with pollution. I cannot stop someone who drives a car and say I get asthma. It’s not because of your car that I get asthma. I get asthma because there’s thousands of cars in my neighborhood, and that’s what’s causing it, and we cannot identify the individual cause, perpetrator, of my asthma.

And it’s the same thing, again, the workers have said, “I get a low wage because that firm charges too high a price for the product it sells.” And this is, I think, the big problem that we have to first of all start to think about. We have to start to think about how to incorporate it. I don’t think the solution is to have workers sitting on boards. If it helps to somehow have a more peaceful way of the business, by all means. But this is not going to solve the problem, because once these workers are on the boards, they still have the objective for the firm to do well. And if I’m on the board of Facebook as a worker, what I want is to do well for all my workers within Facebook, and then they’re just going to maximize the joint surplus, and it’s again maximizing profits. So, basically, the workers on that board are not going to worry about what happens to workers who basically suffer from this economy-wide effect on wages.

Bethany: I was also thinking as you were talking, and tell me if you agree with this, that some of the challenge in this is that there really is no one-size-fits-all solution the way there might have been in a simpler economy. I was thinking about this relative to Amazon. Brad Stone, in his new book, was making the argument that by traditional antitrust metrics, Amazon will never be prosecuted for antitrust, because it has such a small share of the overall retail market.

And yet, if you talk to a seller whose entire business is dependent on Amazon and can be shut down in a day by a change in Amazon policy, they would argue a very different picture. Everything is in how you look at something. I’ve been thinking a lot about the healthcare system, for example, where you may look on a nationwide basis in the United States and say it’s fragmented, but a hospital chain that has a large presence locally can still affect the rates that insurers pay. There’s no one way to look at any industry, and that makes the job far more complicated of determining what actually is too much power and how it’s happening, because it is so radically different.

Jan Eeckhout: I mean, I cannot agree more. We have to really have tailor-made regulation. I mean, every single sector, every single firm, nearly, of these dominant firms is different. I’m arguing for more resources and smarter brains to look at it and I think, again, as you just mentioned, very tailor-made solutions for every case.

Luigi: Can I follow up? On the wages, I agree with you. But what about on the suppliers, like the supplier that Bethany was talking about? The way antitrust is interpreted today is completely ignoring that effect. Should it consider it or not, in your view?

Jan Eeckhout: The question is, how can you do it? Because, again, a supplier is just another input in production as labor is an input in production. And if prices of inputs change, because upstream there’s a large number of firms that have dominant positions, again, we cannot attribute the effect on a given supplier’s profitability or prices directly. It’s coming through an equilibrium effect. And that’s basically, I think, the big challenge.

Luigi: No. I understand the general equilibrium, but I think, and Bethany, feel free to intervene here because I’m interpreting your words, but I think Bethany was talking about a partial equilibrium effect. Simply the fact that today, if I’m a supplier of Amazon, I end up having Amazon controlling my life: what I sell, when I sell, at what price, and whether I’m in business tomorrow. Some people are concerned that’s too much power in one individual, and they think that antitrust could help reduce that concentration of power.

Jan Eeckhout: Yes. I agree that antitrust has a role to intervene. I mean, think about a network platform. We know that the network, basically, first of all needs size, so it has to be large. It generates benefits that are not competitive, in a sense. They can be competed away. And those benefits might be generated through information, they might be generated through certain actions, even though, in a pure property-rights sense, Apple doesn’t allow app users to be on it unless they pay 30 percent as a fee. I think there’s a role for a regulator. There’s a role for a regulator to say, “Well, Apple, you’re lucky that you have that huge platform, that huge size of the market. We don’t want too many of those, because we want to exploit the efficiency gains. But we also realize that, given that you have that platform, you don’t face any competition on that platform.” So, whatever the regulator would do, in the case of Bethany’s Amazon example, would be taking into account all these side effects, if you want, that are not directly affecting customers, but they’re affecting all the players that are directly involved.

Bethany: The way I try to think about it is that it may be, arguably in fact, even good for the customer if Amazon is selling somebody’s product, and Amazon snoops on all the data and says, “What do customers like most about this?” and comes in and undercuts that business and puts them out of business by making their own cheaper model. You might say all’s fair in love and war and ecommerce, but yet, on the other hand, these questions to me go to the heart of our society and the kind of society that we’re shaping and how we want to live and whether our society is stable.

So, I think they are really big, fundamental questions, not just that are broader than the economy, because they go to the heart of this notion of fairness. And the more you have people feel like they’re living in a world that isn’t fair, where their business can just be cut out from under them and there’s nothing there to stop that from happening, the less stable a society you have. And that’s, I think, dangerous for everybody, over the long term, maybe even over the short term.

Jan Eeckhout: We don’t need small businesses that are inefficient. We don’t have to keep small businesses alive just because they’re small, and we want to do some good for these businesses. But we need at least some businesses that impose a fringe competition to these larger ones. You don’t need to be a big player to just plug into the AT&T network and offer service. You don’t need to be the size of AT&T, but by being small and easily having access to that market, you do have an effect on the price that AT&T can charge. Because if you, as a small player, start to lower your prices, you start maybe with a particular community that you’d want to target, this is going to have an effect. They’re going to lose customers. And in that sense, we need those small players. But I don’t think we have to subsidize these inefficient small players. We have to set the stage to move the goalposts of the competitive environment in such a way that there is real competition.

I think, and this is now way beyond economics, this is something that is both politically and socially potentially very harmful. Because the type of polarization that we see in economic terms translates into political polarization, translates into social polarization. It looks like being very negative and very pessimistic, but the way this type of market power that generated inequality ended in the second industrial revolution in 1914 was with war. So, we had World War I, one Great Depression, and another war. I don’t think it will be easy for many people, and then we all own stocks some way or another, to say, “Hold on. 34,000? The Dow Jones? Well, if you have competition, it’s going to be 10,000.”

Are we going to lose that much money, all of us? I mean, these are the type of questions we have to think about in what the consequences are going to be if we really want to be serious about this. And the social issues related to that tension are, in my view, directly derived from the economic issues we’re going to have to be facing very soon. Because if this keeps going, I don’t think, even if we have a recession because people think there’s going to be inflation, the Dow Jones is not going to stop rising in the long run, unless we do something about the market power.

Luigi: I could not agree more. But as economists, maybe we bear a bit of responsibility here because, generally, there are two types of economists. There are the economists a la Mariana Mazzucato that want the government to do everything. To innovate, to spend a lot, et cetera. And then, there are the minimalist economists who want the government completely out of the economy, including direct regulation.

So, I always cite this example. Early on in social media, there was a company called Power Ventures. And this company was basically disintermediating Facebook, connecting a consumer with multiple social media at the same time, allowing what we call in jargon multihoming. That, for normal human beings, means being in multiple platforms at the same time.

And that really takes away a lot of the power of Facebook. Now, Facebook saw immediately the threat and sued the hell out of Power Ventures and was able to establish something that, I’m not a lawyer, but it seems crazy to me, which is that if I give Bethany the login to my Facebook account, the login and password, and she comes in with my permission, she commits a federal crime, which is hacking.

So, this is an example of how the power of the lawyers, the lobbying, are so important to create, to shape the technology in a more monopolistic direction. I am of the view that technology is not just the manna that falls from heaven, but it is something that can be shaped. And we need a government that is not directing it where to go, because I don’t think that it’s capable of doing it, but it should be directing the traffic so that the market remains competitive.

Don’t you think that we have been missing as economists in doing that?

Jan Eeckhout: I completely agree. I cannot agree more. I mean, I think talking now about the solutions, in my view, we have to agree how costly it is to have this market power. I think it’s costly, you can measure it different ways, but I think there’s different pieces of research that measure it high. We measure it as 9 percent of GDP per year, so that’s high. Compared, by the way, to the cost of inflation, which is less than 1 percent. I think that the first thing we have to do as economists is advocate for a much stronger knowledge base in order to do something about it. To deal with the 1 percent or half percent of the cost of inflation, we’ve set up an independent central bank, and I think, from an academic point of view, it’s the biggest success that economists have had in terms of influencing policy. Because it’s controlled inflation, it’s done it in a very professional, academic way, it’s done with a lot of people. I mean, the Federal Reserve System has about 30,000 people.

Now, look at what we do with antitrust. We have around 3,000 people working between the FTC, between the Department of Justice. I mean, that’s about one-tenth. Now, if we want to use that one-tenth of the force of people behind that to solve a problem that is 10 times larger in terms of the cost of GDP, it seems to me that this is just completely disproportionate. And I think one of the things that we should do is recognize that every market is different. And so, we should look much more specialized, we should deal with patents in a different way. A patent for a vaccine is very different from a patent for software. At the moment, the legal status of this is identical. And so, I think there’s a lot more that we can do that is much more knowledge-based, much more technological, much more scientific, to address this issue. And this brings me back to the independent Federal Reserve. We need to make this independent of the political system. And if we can make such an authority independent of the political system, I think half the battle is won.

Luigi: Jan, you consider yourself an industrial-organizational economist, right?

Jan Eeckhout: Actually, I don’t like labels too much, but if you push me on a label, I would say I’m a macro labor economist.

Luigi: I see. That makes it even more interesting, because what I notice is that all the industrial-organization economists I know in the United States, so maybe all is too extreme, but the vast majority of them don’t seem to be too worried about this stuff that you are describing. The only ones who are worried tend to be Europeans or known industrial-organization economists. And so, in your opinion, do you think that this correlation is invented? If it’s not invented, is there a potential reason, or why do you think that’s the case?

Jan Eeckhout: First of all, I agree with you that a lot of people in the IO community do not see this as a problem, but I also think that it’s more than just a few people, and not just a few Europeans who are marginal or fringe in the profession. I think there’s more people who have a concern. I mean, I won’t name names, because I don’t want to put people on the spot, they’ll do it themselves, but there’s people, I think, at the top of the pyramid, if you want, in the elite universities who believe the same thing.

Now, I think the best thing for us as academic economists is that there’s an open debate, and the most productive way of making progress is to have a difference of opinion. I mean, if we all were to agree, I don’t see that we would actually find or get to the minute details of what exactly is going on, because if someone wants to prove wrong what someone else says, then we’re really going to get at it. And I think that’s happening, and if it turns out that what I and my coauthors find is proven wrong, I think this is part of the discovery process. We don’t have to claim something to be the truth before we’ve established it, and if it’s wrong, it’s great. We’ve learned something.

At the moment, my reading of the facts is that there is an issue. People have different opinions for different reasons. It may be because they study different markets. There are different measurement issues, there are different issues about how you really can come to the conclusion. One thing is to say, broadly, there is market power. The other thing to say is, how do you quantitatively establish this?

But I would suggest, let’s have as many points of view on the same problem, and as I said, in terms of the solution with my independent federal competition authority, let’s have more smart people look at it.

And, again, we can have a different solution for the problem with Facebook, Instagram, and WhatsApp than we have for AB InBev, we can have very different solutions. And if smart people look at it, we do market design as economists to auction off bandwidth for our mobile communication. I think we can do a lot of stuff in terms of market design to improve how eBay works. eBay has a dominant position. I’m sure there’s a lot of stuff that we can do, and we have smart people who are willing to do it.

Luigi: Jan, you touch on a sensitive topic, because as you might know, we had a previous podcast about market design of the spectrum, and how this was maybe not designed optimally from a public-finance point of view because of the interest of some players. So, I think there’s a very tricky issue here, which is the one you very brilliantly tried to avoid, but I want to bring you back, because I think it’s important.

So, I agree that if the best minds are independently trying to work to find the truth, they will figure it out, and I think that’s what academic research is about. However, my impression is that sometimes finding one truth is more rewarding than finding another truth. And then the system doesn’t work very well. So, to what extent is this true in the economics profession at large?

Jan Eeckhout: I mean, there is a revolving door. So, you’re pressing me, let’s talk about this revolving door. One of the things I have argued before is, let’s start with cutting the link between politics and the policy. We’ve done it successfully for controlling inflation. A wonderful success story for academic economists is that we have an independent central bank that is successful in setting inflation. It doesn’t work in Argentina, it doesn’t work in many other countries, it didn’t work in the United States in the ’70s either, but now it works.

Bethany: For now.

Jan Eeckhout: Yeah. For now. That’s a fair point. By the way, one of these things in terms of policies, we also have to be able to adjust as times change. I mean, things change, so we have to be able to adjust our policies as things evolve. So, that’s the first step. One of the reasons I believe that you have a revolving door maybe with people having opinions that . . . There’s also a principal-agent problem between the academic economist who works for a company and who is voicing opinions. Well, again, let’s have someone design those. Now, you would say, “Who’s going to design a designer?” Because we can go further and further, and there’s always going to be an agency problem.

But let’s start by cutting the link between politics and policy. I’m not arguing that we have to have technocrats deciding everything. There’s political oversight, for sure, as there is with the independent central bank. But I think if we start to take steps where we think about the optimal design rather than assume it . . . I mean, this interoperability is very easy to implement in the United States telecom market. It doesn’t take really, really, really, very smart people, it takes just a little bit of common sense. You look around, you say, “Let’s see, in the other countries, what they do.”

That’s, by the way, how it worked with the independent central banks, too. I believe it was New Zealand that did it first. People started to see the results, and it was easily adopted. We knew from the theory how to do it. Lucas had told us in the ’70s, but it took until the ’80s, ’90s, before it was actually implemented. And I think that’s feasible, that’s doable. The revolving door is going to be slowed down, there’s going to be a little bit more friction, a bit more squeaking, once this political connection is broken. And I think that’s going to be the first step. Now, of course, you have to ask the people who benefit from it to break the connection, and that’s the hard part.

Bethany: Yes. And you have to ask somebody to pay for it who wasn’t going to benefit from it, which is another hard part.

Luigi: Perfect. It was a pleasure. Bye-bye.

Jan Eeckhout: Thank you so much. Bye-bye.

Bethany: Do you agree with his argument? Do you think that market power is primarily the reason why we haven’t seen the share of national income that’s allocated to wages, why we haven’t seen that going up?

Luigi: I think it’s a combination of three factors. Now, decomposing them is a bit difficult, but one factor is certainly what he says, that is, the market power on the product market side.

There is also another aspect that Jan talks about in his book that is monopsony or oligopsony. This is really a technical term. But monopsony is when you have only one buyer, oligopsony is when you have a few buyers. And, in many labor markets, you have a limited number of employers, and actually, of all people, Adam Smith said first, “When you have few employers, they often end up meeting even for reason of enjoyment,” he says, “and they conspire to keep the price of labor low.” And even if they don’t conspire directly, I think that the risk that they internalize the potential effect of raising wages is pretty strong.

So, if I am a small firm and I desperately need a worker, I’m going to raise the price. I don’t care about the effect that this has on everybody else. If I am a large employer in a deserted area, I think twice before I hire another worker at a higher price, because that will impact all my cost of labor. And that’s a situation in which you have some monopsony power, and that will keep wages low and less competition for wages. Then there is the fact of, certainly, outsourcing has reduced some of the demand for labor here, so the fact is that it’s much easier to move capital around and move labor around, and so, if you produce a lot abroad, you decrease the demand for labor locally.

And the last point that is often forgotten, but I think is important, is there is a lot of friction designed to make it more difficult to raise wages. So, for example, a third of new employment has some form of noncompete agreement. This noncompete agreement makes it more difficult not only for you to get a raise but also for the other people next to you to get a raise. Because most of the time, the reason why I get a raise is because one of my colleagues got an offer at another big university, and then the dean realizes that if they want to keep, not only that colleague, but all the other ones, they somewhat raise the wage for everybody.

Now, if that colleague has a noncompete agreement that he cannot go and work for any other university, he does not get the offer, but his not getting the offer also means that everybody else does not get the raise. I think that that externality is underappreciated because, traditionally, noncompete agreements were reserved for top employees and stuff like that. But today, sometimes even if you go to work at McDonald’s, you have a noncompete agreement.

And, to be fair, and I want our listeners to know this because it’s important, if you live in the Free Republic of California, noncompete agreements are not enforceable. So, they are written, your employers might ask you to sign it. Sign it freely, because they’re not enforceable because of the decision of the Supreme Court of California. But in other states, they are. And in fact, some states have made them more enforceable in recent years.

Bethany: The ability to put in place a noncompete is an expression of market power, and doing so increases your market power, so a virtuous circle for the exerciser of market power and a vicious circle for those who are being exercised. I was also thinking, as I was thinking about our guest’s book, that in some ways, it’s relevant to this issue of antitrust laws being organized around what’s good for consumers. And that one of the complicating things in this conversation is that, arguably, some technological progress has been really, really good for customers. But yet, customers are the same as workers in an economy. And so, even if it’s good for customers in some ways, even if you can argue customers are benefiting, the customers are the workers, and I think we tend too often to think of things in artificial buckets. There’s the customer and there’s the worker, when in reality they’re actually the same person, right?

Luigi: Yes. But to defend a bit the so-called consumer welfare approach, there is a logic to it, and it’s the following. What we are concerned about is that we adjudicate antitrust decisions on the basis of a fight between different producers, in which we protect one producer at the expense of another one. And that becomes a very difficult political decision and a decision that is not very suitable to a judge. You might want to have some industrial policy, but you don’t want to delegate industrial policy to a judge. And so, I think that consumer welfare was a clever way to reduce the discretionality of the decision, and so make it more viable for judges to implement.

What should have been done is some other decision or some other intervention that complements this decision. Now, we’re putting too much in the basket of, “If we fix antitrust, we fix everything.” I think that what we need to be careful about is we need some regulation that promotes competition, as was done in the past. Interoperability among phones was crucial to the success of the cellphone industry. We don’t even bother about that or think that this is invasive regulation. It’s what we call procompetitive regulation. And the same is true for the availability of voice over the internet, or the portability of the cellphone number, or even the sharing of some of the infrastructure.

All this regulation that exists in the traditional industry of telecommunication is not there in the new industries. And the new industries disproportionately favor one side at the expense of everybody else, concentrating not only economic power but also political power, so I think that that’s what we need to be very careful about.

So, Bethany, what do you think about Jan’s idea of a central bank-like antitrust?

Bethany: I worried about that idea a little bit, because I think, per some of the other episodes we’ve done, he is highlighting the independence of the central bank and of this is a viable approach for the future. And it’s a central bank of old. It’s Paul Volcker’s central bank, without taking into account that every institution can become politicized, and our central bank, now I think, is not the pure repository of profound decisions that it might once have been. I think it’s become politicized as well. And I think in anything to do with a bigger swath of the economy . . . It’s not that money isn’t a swath of the economy, it is the economy, but it’s the bedrock. And if you’re thinking about a central bank to regulate business, it sounds theoretically good, but how do you possibly keep that free of political and corrupting influences? It felt like an academic solution to me, a beautifully elegant academic solution, but one that would be problematic in the real world.

Luigi: Yeah. I think you use “academic” like I use “journalistic,” and it’s not a term of endearment. But I agree with you on this, because I am actually more populistic in this view. I think it was William F. Buckley, Jr., who said, “I prefer to be governed by people randomly chosen from the phone book,” when the phone book still existed, “rather than the Harvard Senate.”

I am with you. I think that, certainly, having expert advice is very valuable, but it’s very dangerous to substitute experts for political decisions, because experts have politics, too, and very often it’s hidden.

Certain decisions are political decisions and should be taken with some democratic process, rather than in a closed room. Now, they’re not smoke-filled rooms anymore, because people know better than smoking, but they still have the same stale air, and you don’t bring enough alternative views to the table. I’m not that enamored of what central banks have done recently, and I would not use them as a benchmark to export to other places.

Bethany: Right.

Luigi: What do you think about the argument that Jan makes that many of the people who advocate for antitrust enforcement also own quite a bit of stock in those very companies and might be negatively affected by it?

Bethany: I’ll try some sort of answer. I would argue that we conflate things we shouldn’t conflate, like being promarket and being probusiness, and we tend to disaggregate things that we actually should conflate. So, we think of things from the perspective of the consumer or the investor and the worker, instead of accepting and recognizing that we are all all three. We are all consumers, we are all workers, we are all investors. And so, the stock prices in your portfolio are going up dramatically, but you’re being laid off by the firm that employs you. Well, then there’s a canceling-out effect. And so, this disaggregation in this context, I think, is singularly unhelpful.

Luigi: Yeah. But to be fair, even if we are all the three things, some people have a lot of stock and they don’t work much, and some people have no stock and they work a lot. So, the distributional effects are pretty large, and I think that Jan is right that if you were to enforce antitrust effectively, you would have an impact on the stock market overall. More, I think, on particular companies than on the market overall, because they will be creating different opportunities, but especially if you’re not well-diversified. If you own a lot of Amazon stock or Facebook stock, I think that that would impact you.

And I saw it firsthand at the meeting of the Chicago Council. There was a person in the audience that raised his hand and said, “Oh, but why do you want to enforce antitrust? I own some stock and I don’t want the stock to go down.” So, it would have an impact, and that’s the reason why, going back, it’s a political decision, because it has to do with redistribution and cannot be simply delegated to experts, because experts might have a particular viewpoint on this.

Bethany: It’s interesting in a way, isn’t it, in that China’s almost running the experiment for the US? And I’m generalizing grossly, I realize, but when you have China cracking down on Ant Financial and on its powerful corporate sector and saying, “No, we’re not going to allow this kind of power,” even though this would be better for these companies’ stock price capitalizations and for the amount of money they’re able to make, it’s almost an experiment of sorts, which will be interesting to observe as we go forward in our own experiment.

Luigi: Yeah. It’s an irony that a communist country values antitrust more than a free-market country.

Bethany: Yeah. That, I would say, is a great irony.