In the interest of full disclosure, I need to state that Jonathan Tepper is a friend of mine and sent me uncorrected proof of the book. So when I say that it's a must-read, I'm biased. But you don't have to take my word for it: the book has received endorsements from many prominent people in and out of finance, including Paul Marshall, Kyle Bass, Josh Wolfe, Martin Wolf, Niall Ferguson, Sir Angus Deaton, Ken Rogoff, Tim O'Reilly, and Richard Lugar.
My favorite finance/investing books mix theory with explanatory anecdotes. Myth of Capitalism follows that format. It surveys the academic literature on economic concentration, citing dozens of academic papers and books that are broadly relevant. But it also has industry-specific case studies and anecdotes, some of them quite illuminating.
The basic message
When most people think of harmful industry concentration, they think of monopolies: Standard Oil and the like. Myth of Capitalism argues that this emphasis is misplaced, with duopolies and oligopolies being almost as anti-competitive as monopolies and far more common.
The book also argues against the prevailing anti-trust philosophy pioneered by Robert Bork and various Chicago School economists. At the risk of oversimplifying, the Chicagoans asserted that mergers are generally good because they lower consumer prices and increase corporate efficiency.
The book cites research suggesting that both claims are wrong: mergers are more likely than not to raise prices, especially once an industry consolidates to a handful of players, and price hikes are more important than synergies in increasing profit margins after a merger.
And even if one accepts the Bork/Chicago arguments, they ignore several things:
• Business concentration doesn't just affect consumer prices; it also gives companies more bargaining power versus their workers.
• The internet has given rise to several new businesses that dominate their respective niches while offering free products, e.g. Facebook in social networks and Google in internet search. A narrow focus on consumer prices ignores these companies' ability to take abusive and anti-competitive actions against business rivals.
• Corporate efficiency isn't the end-all and be-all of competition. While large, mature businesses enjoy economies of scale, they also innovate far less than smaller companies, adjusting for size. I found the book's discussion of this to be one of its highlights.
Regulation and economic concentration
Tepper isn't Elizabeth Warren or Thomas Piketty, and Myth of Capitalism doesn't argue for higher taxes or against capitalism. While the book calls for greater anti-trust regulation, it points out that other kinds of regulation frequently reduce competition. In particular, large companies can bear the cost of onerous or complex regulations more easily than their smaller competitors.
In 1892, Richard Olney, then a railroad lawyer and later US Attorney General, presciently described how regulation can serve the interests of big corporations:
The [Interstate Commerce] Commission, as its functions have now been limited by the courts, is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a Commission gets to be, the more inclined it will be found to take the business and railroad view of things. It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interest...
The book mentions intellectual property law as another way the government suppresses competition. Since 1982, the number of patents issued each year in the United States has surged, even after adjusting for population growth. And copyright terms have been lengthened, thanks in large part to lobbying by Walt Disney Company. Ironically, many of Disney's movies are based on traditional stories that have long been in the public domain.
Yet another problem is the revolving door between regulators and the companies they regulate. For instance, patent examiners who later move to jobs in the private sector are more likely to approve patents, especially for the companies that ultimately hire them.
Highlights for investors
Of the many academic papers the book cites, two are particularly relevant for investors:
• In a 2017 paper, Gustavo Grullon, Yelena Larkin and Roni Michaely find that 75% of industries in the U.S. have become more concentrated over the past twenty years and that as an industry consolidates, its constituents experience abnormally high stock-market performance.
• Writing in 2006, Margaret Levenstein and Valerie Suslow find that real interest rates determine the prevalence of corporate cartels. As the book states, “the most important factor in the creation and breakups of cartels was the interest rate. Cartels are more likely to breakup during periods of high real interest rates, presumably because higher interest rates require higher immediate rates of return for collusion. [Levenstein and Suslow] found the relationship was almost perfect.”
Despite its wealth of information, Myth of Capitalism isn't a dispassionate analysis of economic concentration. At heart, it's a work of advocacy, one that argues for stricter anti-trust measures. In light of that, and although I agree with its main argument, I'd push back on a couple things:
1. As mentioned, cartels are more likely to form and last longer when real interest rates are low. So economic concentration is cyclical, and we may see a decline in concentration even if anti-trust regulation remains permissive.
2. By focusing on economic concentration and cartels, the book downplays alternative explanations for some of the problems it describes.
For instance, it mentions that corporate profits' share of GDP has risen, and employee compensation's share has commensurately fallen, since the 1980s and especially since 2001. This coincides with the cartelization of American business, but it also coincides with globalization. I think it's no coincidence that China joined the World Trade Organization in 2001.
On the other hand, there are many oligopolistic industries for which globalization is irrelevant. Health care in the U.S. is mostly insulated from foreign competition, and some of the book's most striking case studies involve drug companies and other health-care players.
I've tried to capture Myth of Capitalism's highlights, but it has many other details readers may appreciate, for instance:
• Which government was the first to issue patents
• How Standard Oil's business model influenced German industrialization before World War II
• How the merger wave of the 1890s-1900s differed from a second merger wave in the 1920s
• How companies with abnormally high lobbying expenditures tend to outperform their peers in the stock market
• Why economic concentration disproportionately affects rural areas
• Why new business formation has declined in the U.S. since 2009