Can Experts Structure Markets? Don’t Count On It.

Corbin K. Barthold —  28 May 2019 — Leave a comment

This guest post is by Corbin K. Barthold, Litigation Counsel at Washington Legal Foundation.

Complexity need not follow size. A star is huge but mostly homogenous. “It’s core is so hot,” explains Martin Rees, “that no chemicals can exist (complex molecules get torn apart); it is basically an amorphous gas of atomic nuclei and electrons.”

Nor does complexity always arise from remoteness of space or time. Celestial gyrations can be readily grasped. Thales of Miletus probably predicted a solar eclipse. Newton certainly could have done so. And we’re confident that in 4.5 billion years the Andromeda galaxy will collide with our own.

If the simple can be seen in the large and the distant, equally can the complex be found in the small and the immediate. A double pendulum is chaotic. Likewise the local weather, the fluctuations of a wildlife population, or the dispersion of the milk you pour into your coffee.

Our economy is not like a planetary orbit. It’s more like the weather or the milk. No one knows which companies will become dominant, which products will become popular, or which industries will become defunct. No one can see far ahead. Investing is inherently risky because the future of the economy, or even a single segment of it, is intractably uncertain. Do not hand your savings to any expert who says otherwise. Experts, in fact, often see the least of all.

But if a broker with a “sure thing” stock is a mountebank, what does that make an antitrust scholar with an “optimum structure” for a market? 

Not a prophet.

There is so much that we don’t know. Consider, for example, the notion that market concentration is a good measure of market competitiveness. The idea seems intuitive enough, and in many corners it remains an article of faith.

But the markets where this assumption is most plausible—hospital care and air travel come to mind—are heavily shaped by that grand monopolist we call government. Only a large institution can cope with the regulatory burden placed on the healthcare industry. As Tyler Cowen writes, “We get the level of hospital concentration that we have in essence chosen through politics and the law.”

As for air travel: the government promotes concentration by barring foreign airlines from the domestic market. In any case, the state of air travel does not support a straightforward conclusion that concentration equals power. The price of flying has fallen almost continuously since passage of the Airline Deregulation Act in 1978. The major airlines are disciplined by fringe carriers such as JetBlue and Southwest.

It is by no means clear that, aside from cases of government-imposed concentration, a consolidated market is something to fear. Technology lowers costs, lower costs enable scale, and scale tends to promote efficiency. Scale can arise naturally, therefore, from the process of creating better and cheaper products.

Say you’re a nineteenth-century cow farmer, and the railroad reaches you. Your shipping costs go down, and you start to sell to a wider market. As your farm grows, you start to spread your capital expenses over more sales. Your prices drop. Then refrigerated rail cars come along, you start slaughtering your cows on site, and your shipping costs go down again. Your prices drop further. Farms that fail to keep pace with your cost-cutting go bust. The cycle continues until beef is cheap and yours is one of the few cow farms in the area. The market improves as it consolidates.

As the decades pass, this story repeats itself on successively larger stages. The relentless march of technology has enabled the best companies to compete for regional, then national, and now global market share. We should not be surprised to see ever fewer firms offering ever better products and services.

Bear in mind, moreover, that it’s rarely the same company driving each leap forward. As Geoffrey Manne and Alec Stapp recently noted in this space, markets are not linear. Just after you adopt the next big advance in the logistics of beef production, drone delivery will disrupt your delivery network, cultured meat will displace your product, or virtual-reality flavoring will destroy your industry. Or—most likely of all—you’ll be ambushed by something you can’t imagine.

Does market concentration inhibit innovation? It’s possible. “To this day,” write Joshua Wright and Judge Douglas Ginsburg, “the complex relationship between static product market competition and the incentive to innovate is not well understood.” 

There’s that word again: complex. When will thumping company A in an antitrust lawsuit increase the net amount of innovation coming from companies A, B, C, and D? Antitrust officials have no clue. They’re as benighted as anyone. These are the people who will squash Blockbuster’s bid to purchase a rival video-rental shop less than two years before Netflix launches a streaming service.

And it’s not as if our most innovative companies are using market concentration as an excuse to relax. If its only concern were maintaining Google’s grip on the market for internet-search advertising, Alphabet would not have spent $16 billion on research and development last year. It spent that much because its long-term survival depends on building the next big market—the one that does not exist yet.

No expert can reliably make the predictions necessary to say when or how a market should look different. And if we empowered some experts to make such predictions anyway, no other experts would be any good at predicting what the empowered experts would predict. Experts trying to give us “well structured” markets will instead give us a costly, politicized, and stochastic antitrust enforcement process. 

Here’s a modest proposal. Instead of using the antitrust laws to address the curse of bigness, let’s create the Office of the Double Pendulum. We can place the whole section in a single room at the Justice Department. 

All we’ll need is some ping-pong balls, a double pendulum, and a monkey. On each ball will be the name of a major corporation. Once a quarter—or a month; reasonable minds can differ—a ball will be drawn, and the monkey prodded into throwing the pendulum. An even number of twirls saves the company on the ball. An odd number dooms it to being broken up.

This system will punish success just as haphazardly as anything our brightest neo-Brandeisian scholars can devise, while avoiding the ruinously expensive lobbying, rent-seeking, and litigation that arise when scholars succeed in replacing the rule of law with the rule of experts.

All hail the chaos monkey. Unutterably complex. Ineffably simple.

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