Killing the Spherical Cow in Economics
Comparing Chicago, Post-Chicago, and Neo-Brandeisian Schools of Thought
In a continuation of the theme of “listening to people smarter than me”, in this post I’ll be writing about a recent article in the George Mason Law Review by Professor of Economics and Adjunct Professor of Law at the University of Utah, Mark Glick, and Leonard B. Rosenberg Professor of Law at the University of Houston Law Center, Darren Bush. The article sums up something I started to highlight in my previous posts Law and Neoliberal Politics, and Piecing Politics and Economics Back Together. Namely that there is no way to separate economics from politics. Having studied physics in college, the necessary assumptions and simplifications of neoliberal (also known as Chicago School) economics always make me think of the spherical cow. An oversimplification of a problem can provide some useful information and in limited cases it could provide all the information we need to know, but you wouldn’t make important decisions based on that simplification. You’d try to find as accurate an answer as possible. This should be especially true when we consider policy decisions which create institutions that affect millions of people’s lives.
Unfortunately, the contributions of The Chicago School to antitrust policy in the U.S. since the late 70s have been basically a spherical cow problem. The rapid adoption and rise in popularity of the theories they proposed are less indicative of the truth of their claims and more indicative of the power of wealthy individuals and corporate lobbyists to influence both the accumulation of knowledge and policy in the U.S. NPR’s Planet Money reported that as early as 1976 federal judges were being taken to fancy beach resorts to learn the Chicago School’s economic theories and how they should be applied to antitrust enforcement. They report that “by 1990, 40% of the nation's federal judges had gone to one of these retreats, including two judges who would wind up on the U.S. Supreme Court, Ruth Bader Ginsburg and Clarence Thomas.”
This all takes me to the law review article. Glick and Bush given an excellent overview of the three major schools of anti-trust thought over the past few decades: The Chicago School, the Post-Chicago School, and the New Brandeisian School. As an aside, Louis Brandeis is an inspirational and powerful figure in U.S. history who I only started to learn about a few years ago. He was the first Jew appointed to the Supreme Court and was very rigorous in his research and argumentation throughout his career, working on anti-trust, right to privacy, and other issues that still impact us today. Glick and Bush point out one of the most damaging ideas pushed by the Chicago School and accepted by many: that they were making antitrust policy “scientific” through economic analysis. Unfortunately, they promoted
“both the Consumer Welfare Standard (a normative economic theory to segregate legitimate economic competition goals from “value judgments”) and a basic positive microeconomic theory to show how much of the conduct previously considered anticompetitive was justified on “efficiency” grounds.”
I talked about Lina Khan’s takedown of this framing in my post Law and Neoliberal Politics. She and many others have shown how the narrow standards of Consumer Welfare and efficiency have led to corporate monopolization and the many negative effects that come along with it. Glick and Bush highlight that a Post-Chicago school of thought has critiqued the Chicago School and pointed out many of the flaws in their reasoning, with many of the Chicago School’s theories only correct under a series of assumptions that basically never play out in reality (spherical cows). However, they state that the Post-Chicago School looks narrowly at industrial organization economics, rather than broader developments in research across economics. Both the Chicago and Post-Chicago Schools limit themselves to seeing positive impacts in measurable factors such as productivity, efficiency, or output of commodities. While these are important metrics, the narrow focus on a specific sector of the economy limits the usefulness of their analysis to determine what is actually improving the lives of people in the U.S. and how to bring the most benefit to the most people.
In describing Chicago and Post-Chicago theories, the authors review a variety of antitrust cases and show both how those new theories caused judges to break from many long-standing legal precedents, and also how many of the rulings handed down by judges ended up proving false.
“Judge Frank Easterbrook famously argued that even if the Chicago School approach is too permissive, the impacts should be minimal:
‘For a number of reasons, errors on the side of excusing questionable practices are preferable. First, because most forms of cooperation are beneficial, excusing a particular practice about which we are ill informed is unlikely to be harmful. . . . Second, the economic system corrects monopoly more readily than it corrects judicial errors. . . . Third, in many cases the costs of monopoly wrongly permitted are small, while the costs of competition wrongly condemned are large.’
None of Easterbrook’s assumptions, however, necessarily follow from the Consumer Welfare Standard. They appear to have been taken on faith, much like the Consumer Welfare Standard itself.
Worse, his assumptions have proven factually false. Coordinated practices are more widespread than Easterbrook claims. The average cartel in the studies reviewed by Professors Margaret Levenstein and Valerie Suslow survived 3.7 to 10 years, and historically, some cartels endured for more than fifty years. Using a more current example, there is no sign of market forces undermining the monopoly power of the tech platforms. Thus, the myth of transience of monopoly power strongly endures its empirically disprovable assertions.”
The authors also include a comparison of several productivity metrics under the Pre-Neoliberal and Neoliberal eras, reproduced below.
Now, these metrics are not, by themselves, sufficient to prove the value of Pre- vs Neoliberal policies if only because there is a lot of historical and political context to take into account as well. This includes a booming post-war economy and a long period of strong union engagement (that wars tend to benefit our economy is a topic for another post). However, along with much of the other evidence the authors provide, including the specific assumptions of both Chicago and Post-Chicago School theories that have been disproven, or never were based on empirical analysis in the first place, Glick and Bush make a strong case for a new view of economics in policy-making, specifically for antitrust policy.
In examining this new view they state:
The New Brandeisians reject several of the basic premises of the economic analysis of the Chicago School and the Post-Chicago School. Specifically, they repudiate the Consumer Welfare Standard, they wish to restore antitrust’s traditional social goals, and they offer new policy objectives for antitrust. These issues will be addressed in the next section. Finally, they dismiss the economic method of taking markets as primary and natural and then turning to government action only when a “market failure” is present.
This naturalization of the market is an ideological ploy. There is no reason to think of global markets as any more natural a form of human organization than governments, collectives, or any other form of cooperative behavior. They go on to say:
As Professor Bernard Harcourt describes,
‘The fundamental problem is that foundational categories of, on the one hand, “market efficiency” or “free markets,” and on the other hand, “excessive regulation,” “governmental inefficiency,” or “discipline,” are illusory and misleading categories that fail to capture the irreducibly individual phenomena of different forms of market organization. In all markets, the state is present.’
One of the key features of New Brandeisian thought is that economists explicitly state their values of increasing human welfare, and attempt to quantify human welfare as much as possible in all of the many ways it can be seen. They look at political, economic, and social factors to determine the impact of a policy, rather than overly-simplified assumptions of productive output equating to human welfare (another spherical cow). This comes from the idea that scarcity of resources is the cause of human suffering and economics is about allocating scarce resources in the most efficient way possible. As I learn more about the scarcity framing of economics, I hope to explain the narrow assumptions behind this worldview in a future post.
Antitrust economists assume welfare is equivalent with output. But modern welfare economists across the board reject this assumption. Instead, welfare economists agree that distribution and inequality are critical dimensions of human welfare, as are choices of opportunities and democratic participation, the types of goals advocated by the New Brandeisians.
To close out this post, I’m going to put an extensive quote from the article in which they highlight some of the underlying evidence that supports the New Brandeisian approach to antitrust enforcement.
In addition to evidence from legislative intent, economic research supports the New Brandeisians’ goals of political democracy and reducing inequality.144 For example, in their comprehensive study of why some nations fail, Professors Daron Acemoglu and James Robinson identify inclusive economic and political institutions as the one common element of successful economies:
‘Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions . . . . Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner . . . .’145
For Acemoglu and Robinson, an inclusive economy is one that is not dominated by a few large firms, and an inclusive political system is one in which political power is similarly dispersed.146 They argue that inclusive political institutions create successful economies by allowing the creative destruction of old technologies and the encouragement of new and better innovations (think the replacement of fossil fuels by more efficient climate-friendly technologies).147 Only when dominant firms unduly wield political power can rent-seeking and value-extraction be sustained.148
Excessive political influence allows dominant firms to externalize costs. Dominant firms can outsource wages and benefits to smaller firms, and the public can be forced to bear the costs of environmental damage and any necessary social safety protections.
The good news is that, as I’ve said previously, the tide seems to be changing. With competent regulators appointed to the FTC, CFPB, and USDA and an explicit goal of increasing competition across our economy, the Biden administration has made some strides towards improving the situation and moving toward a more inclusive and empowering political and economic system. These changes are not guaranteed to stay, and the power of concentrated wealth can still be used to reverse them, so we must be vigilant and include a more holistic and rigorous economic analysis as an important tool when defending the rights all people should have. I hear spherical cows make the best burgers.