“Capitalism” is the hot topic of political discussion—and criticism—in the global media. Much of this criticism involves claims that modern capitalism has resulted in reduced economic growth and increased economic inequality in Western societies in recent decades. This, in turn, has fueled a resurgence in populist and socialist ideologies that are challenging the primacy of capitalism in Western democracies—including in the supposed bastion of “free market” capitalism, the United States.

Jonathan Tepper and Denise Hearn, in The Myth of Capitalism, take a contrarian approach to evaluating and criticizing U.S. capitalism. Tepper, the founder of Variant Perception, a macroeconomic research group catering to hedge funds, banks, and family offices, is the co-author of two previous books on financial topics, Endgame and Code Red, while Hearn is head of business development at Variant Perception. As the authors state: “The unbridled, competitive free markets that the Right cherishes don’t exist today. They are a myth.” Furthermore, “The Left attacks the grotesque capitalism we see today, as if that were the true manifestation of the essence of capitalism rather than the distorted version it has become.”

If the solution to capitalism’s problems is not in the platforms of the political right or left, then what can address the underperformance and inequality in the U.S. economy? Tepper and Hearn argue that what is needed is a boost in competition in many key U.S. industries.

Sustainable advantage / The lack of competition in some markets is something that many people agree on, but they do not necessarily see it as a bad thing. Business-world chieftains ranging from Democrat Warren Buffett, the “embodiment of American capitalism,” to billionaire libertarian Peter Thiel, “Silicon Valley’s godfather,” deliberately seek out investment in uncompetitive sectors. For nearly four decades, Harvard Business School professor Michael Porter’s Five Forces of Competitive Strategy framework has taught future executives, hedge fund managers, and venture capitalists to analyze and evaluate competitiveness in different industries and avoid those industries with high levels of competition. For example, two of these five forces are “threat of established rivals” and “threat of new entrants.” The worst-case scenario is for managers to find themselves in an industry where competitors are strong and any potential rival can easily enter the industry and compete.

Strategically, CEOs will develop actionable strategies to keep rivals out of their respective industries. As Tepper and Hearn note, this is why mergers are embraced: to eliminate established rivals. Moreover, it is why companies will employ rent-seeking strategies in the public policy arena to erect regulatory and legal barriers to entry into their industries. Thus, they write, when an oligopolistic industry is created, all the players cooperate and erect barriers to entry, and these cooperative companies (often only three or four) divide the market and collude through price signaling. Ostensibly, any real “competition” is the result of product or service differentiation strategies instead of price strategies, which set off ruinous “price wars” that only depress company profit margins. This market environment is what these oligopoly industry members view as “sustainable competitive advantage.”

Call for antitrust / Tepper and Hearn point to the predominance of the “ultra” free-market University of Chicago view of competition, which focuses exclusively on consumer welfare (“efficiency and the price of goods and services”) as the criterion of antitrust policy enforcement, to the exclusion of all other considerations. The Chicago school has significantly influenced the U.S. Department of Justice’s Antitrust Division, the Federal Trade Commission, and the federal judiciary’s views on the nation’s antitrust policy. According to the Chicago school, “Cartels and collusion were almost impossible because it is difficult to coordinate competitors” because “competitors would be prone to cheat, and new entrants would come in to compete with the cartel.”

However, Tepper and Hearn write, this idea “flies in the face of decades of evidence and billions of dollars in fines.” They note that price-fixing cartels that reduce supply often persist for years and do not necessarily break down as a result of difficulty in coordinating price-fixing agreements. They cite numerous economic research studies that indicate that two-thirds of cartels exist in industries in which the top four firms possess 75% or greater of market share, with the median duration of cartels being five years and some operating for decades. They further note that antitrust expenditures for enforcement actions by the DOJ and the FTC (in constant dollars) have been at all-time historic lows since the 1980s. Finally, they point out that merger waves have occurred in every decade since the Reagan era of antitrust “non-enforcement” began.

The authors refer to modern American capitalism as reminiscent of the Gilded Age of “robber barons” charging exploitative prices because of their market power. Among their modern-day examples:

  • Three companies control 65% of the nation’s cable market but, at the local level, companies face no real competition. (A lack of competition and choice in the broadband market is due to regulation from federal, state, and local governments.)
  • Microsoft controls over 90% of computer operating systems and has similar control over office productivity programs through Microsoft Office.
  • Facebook has over 75% of the market share in all global social media advertising spending.
  • Intel has close to 90% of microprocessor market share.

Tepper and Hearn cite similar industry examples of duopolies:

  • Visa and Mastercard control over 80% of the payment system market, with American Express in a distant third position.
  • Molson Coors and AB InBev control over 90% of the U.S. beer market.
  • Apple and Google effectively control 99% of the phone operating system market.
  • In 2016, Google held 76% of the search ad market, while Facebook accounted for 78% of U.S. social advertising.

When it comes to oligopolies, Tepper and Hearn pull no punches. They begin with credit reporting bureaus. Today, after multiple mergers, only three companies control the credit reporting market: Experian, Equifax, and Transunion. The U.S. airline industry consists of four major airlines—American, Delta, United, and Southwest—with each smart enough to stay out of the others’ hubs. Four firms dominate the mobile phone industry: Verizon, Sprint, AT&T, and T‑Mobile. In the banking industry, four banks—JPMorgan Chase, Bank of America, Citigroup, and USB—control 44% of the $15.3 trillion in assets held by U.S. banks. In the health care services industry, three pharmaceutical benefit managers—Express Scripts, CVS Caremark, and Optum Rx—manage pharmacy benefits for 266 million Americans and control between 75% and 89% of this market. Among drug wholesalers, three—AmerisourceBergen, McKesson, and Cardinal Health—handle more than 90% of all drugs in the United States. When it comes to media and news outlets, six corporations—Walt Disney, Time Warner, CBS, Viacom, NBCUniversal, and News Corp—own 90% of the market. Moreover, with the assistance of government regulators, four major underwriters control 87% of the title insurance market: Fidelity, First American, Stewart, and Old Republic.

Government and competition / Tepper and Hearn do criticize old-style “government-regulated monopoly” intervention. “Capitalism,” they write, “is at its core dynamic, fluid, and daring.” Yet, government, by making a monopoly permanent, can prevent the sort of innovation and competition that challenges the dominant position of established companies. In the case of patents—an exclusive monopoly authorized by the U.S. government—nearly half of the increase in the number of patents granted since the 1980s are tied to low-quality patents and software that are not likely even enforceable under current law; these patents nevertheless stifle innovation and impose enormous costs on society. Government regulation is also an impediment to encouraging competition. For example, when it comes to approving generic pharmaceuticals, as of 2016 the Food and Drug Administration can take three to four years to approve a manufacturer for production of a generic. It is no wonder that pharmaceutical manufacturers can charge what the market will bear, as competition is missing. It is also not surprising that excessive regulation can reduce economic growth, create barriers to entry, and discourage new competitors.

Also not surprising is that rent-seeking activities—i.e., lobbying legislators and regulators—pay off. Companies that successfully lobby can distort “the rules of the game” in their favor. For example, in 2017 pharmaceutical manufacturers paid for 882 lobbyists and spent $171.5 million in their efforts to oppose lower prescription drug prices and to slow the approval of generic drugs. In a study, James Bessen of Boston University’s School of Law found a significant correlation among lobbying, regulation, and profits in a small number of influential industries: pharmaceuticals, chemicals, petroleum refining, transportation, equipment/​defense, utilities, and communications. Tepper and Hearn believe that until lobbying reform takes place, there is little hope for reducing barriers to entry for smaller firms to compete in the marketplace. In conclusion, they write, the consequences of industry concentration lead to higher prices, fewer start-ups, lower industrial productivity, lower wages, higher income inequality, less investment, and the decline of “small town” America.

Policy suggestions / Yet Tepper and Hearn are not without optimism. They offer principles for reform and solutions/​remedies for regenerating American capitalism. Their ideas revolve around several principles, one of which is that capitalism without competition is not the essence of capitalism, but when operating correctly the market results in the diffusion of economic power and political freedom. Further, they claim, the role of capitalism is not maximizing efficiency but creating value for firms, consumers, and employees. Monopolies and not “Big Business” are generally the enemy of markets, competitors, employees, consumers, and society. Moreover, markets must remain competitive and open to new entrants, but capitalism must be in favor of equal opportunity (“a level playing field”) and not equal outcomes. Lastly, competition does not exist independently of government and society because markets operate within the rules established by society and government. For those who espouse a view of robust capitalism and recognizing established rule of law, these principles for reform will serve well.

Under their solutions and remedies section, Tepper and Hearn offer solutions for several policy areas: monopoly and merger, regulation, intellectual property, and shareholders. I will focus on a few of their suggestions that I believe are most significant.

The authors argue that mergers and acquisitions that materially reduce the number of competitors, and thus artificially increase the market share of a dominant firm, should be prohibited and previous mergers that have reduced competition should be reversed. Moreover, a standard for rejecting mergers, say the authors, must be based on a clear, simple rule, namely that industries with fewer than six competitors should not be allowed to merge.

One should be suspicious of the development of complex rules as this is often the result of successful rent-seeking by entrenched oligopolists.

They propose moving away from a rule-of-reason to a per se approach to antitrust enforcement. Considering that today 90% of mergers are successfully completed after antitrust review and antitrust decisions are almost never challenged, the consumer welfare criteria have proven over time to be less than adequate. While I personally prefer a rule-of-reason approach to antitrust enforcement, until antitrust enforcers broaden their consideration of factors beyond efficiency, a blunter rubric may be what is necessary, at least in the short-term. Undoing some previous mergers and acquisitions may be what the economy needs, but this policy will definitely fuel intense rent-seeking behavior by firms potentially affected. A wiser policy approach would be to focus on the future and not the past.

When it comes to regulatory solutions and remedies, Tepper and Hearn argue that regulations must serve society and not erect barriers to entry to small businesses. Given that regulations can play an important role in society, where they protect citizens from safety, health, and environmental harms, administrative rules should nevertheless be calibrated to avoid harming new companies. Such regulations should be based on principles and not complex rules, say the authors. Complex rules impose substantial costs on new entrants and prevent competition. I agree that simple rules encourage following the spirit of the law. One should be naturally suspicious of the development of complex rules as this is often a result of successful rent-seeking activities funded by entrenched oligopolists attempting to quash new entrants promoting competition.

The authors are spot-on when discussing solutions and remedies addressing patents and copyrights. They argue that to promote competition, patents and copyrights must only be granted for a limited time, without extension. For example, a narrower interpretation by the U.S. Patent and Trademark Office of what characterizes a novel invention eliminates de facto extensions of previously patented inventions. Moreover, continually extending the “life” of a copyright beyond a realistic return on investment only extends the benefits to the copyright holder and not to society. Competition must be encouraged once patents expire. The example of generic drugs is telling; the Food and Drug Administration under the Trump administration is undertaking a series of policy initiatives to reduce the regulatory delay on bringing generics to market. Congress should remove patent protection for areas that are rife with abuse. While they cite software and business method patents as prime targets of abuse by “patent trolls,” those areas have received significant relief in recent years. The new target for patent trolls is now the biopharmaceutical industry.

Tepper and Hearn believe that workers must be granted shares in their firms so that labor can become owners of capital. While employee stock ownership plans and 401(k) plans are available to most workers, the authors want employee share programs to be encouraged through legislation and regulation. Because Tepper and Hearn do not define this “employee share program,” I can only assume it would be in the form of stock granted as a benefit of employment, similar to stock options granted to executives as part of their benefits package. I am unsure whether they want this to be imposed by legislation or regulation, or they simply want to encourage employers to provide the option of a share program. Furthermore, the authors argue that managers should be forced to own shares they purchase via stock options for a minimum of a year. This relatively easy fix will incentivize managers to think about longer-term investments (versus a shorter-term perspective) in their companies.

One quibble I have is with the authors’ use of the term “antitrust regulation.” Antitrust law and policy do not coerce a company to do anything; it simply advises executives of what anticompetitive behaviors to avoid. I also disagree with their arguments to change antitrust laws. The authors make a strong case that the problem with the antitrust laws is found in the policy interpretation by antitrust enforcement authorities and the courts. Rather than a weakness, this is a strength of the antitrust laws. The antitrust statutes are interpreted in policy based on the empirical evidence of anticompetitive behavior found in the economy. If the economic results are reflective of a noncompetitive environment, then, for example, a new interpretation of pre-merger antitrust agency evaluation of factors to effectively address evidence of anticompetitive behavior may be warranted.

Tepper and Hearn offer a well-researched and provocative book for policy analysts and executives to consider and debate. There is too much disturbing narrative here to ignore.