Abstract
The author tells the tale of her journey to discover the synergy between equity and efficiency.
In the last quarter of the last century in matters of economic law, it was common cause that we could pursue either efficiency or equity but not both; the twain would not meet. I never believed it.
The Gospel of Efficiency was ushered into U.S. antitrust by the Chicago School, whose beautiful proofs, 1 dating at least from the 1960s, 2 were resisted by U.S. law and policy makers until the early 1980s. They gained traction with the presidential election of Ronald Reagan (1980), validating the national sentiment that government had wormed its way too deeply into the business of business; that business was essentially efficient, and that if we simply left business free to do the work of business, we would all be better off. Pursuit of equity was regarded as wrongheaded. If we pursued equity, we would undermine efficiency. The pie would shrink and we would all be worse off.
Arthur Okun’s 1975 book, Equality and Efficiency: The Big Tradeoff, 3 laid a foundation for this thesis. In the book, which itself was a gospel until the early 21st century, Okun concluded from theory that as we equalize the distribution of income, we decrease the efficiency of the economy and that therefore society should forgo greater equality for a healthier economy. Empirical research indicated the contrary (for example, Lane Kenworthy, Equality and Efficiency: The Illusory Tradeoff 4 ) but seems to have attracted little attention in the United States. At least in the U.S. antitrust community, since the third quarter of the 20th century, there has been a widely shared belief that efficiency is the holy grail and, moreover, that U.S. antitrust precedents in the 1960s to mid-1970s (which constructed an antitrust of the underdog and equated antitrust with economic democracy) was erroneous if not also contemptible.
There was in any event a missing link. The literature on equality and efficiency normally referred to income equality, which is equality of outcome, and the equality (or equity) embedded in 1960s U.S. antitrust was equality of opportunity and inclusiveness. This seemed an unimportant distinction to the Chicagoans of the 1970s–1980s, who adopted a line taken out of context from the Brown Shoe opinion of the Supreme Court in 1962 enjoining what today we would call a trivial merger: “It is competition, not competitors, which the Act protects.” 5 The epithet was and is commonly used as an iteration of the equity-efficiency trade-off: Do not give regard to (smaller) competitors or you will harm efficiency. Equity, equality, opportunity, fairness—Don’t go there. The science of antitrust economics is about efficiency. Equity undermines efficiency.
The break did not come until the turn of the 20th century, both through experience and research. The experience was a harsh one; it was the brutal recession of 2007–2008. Alan Greenspan, who was Chairman of the Federal Reserve Board and thus the leader of monetary policy for the United States, had to admit that there was “a flaw [in my] model.” 6 Some blame was laid at the feet of the economists, who were so sure that the market would work that they opposed regulation of new financial instruments derived from mortgages sold to low-income home buyers who could afford the mortgage only so long as house prices continued to rise. Theory had outrun reality. One might have thought that U.S. antitrust jurisprudence (which by then was extremely laissez faire with respect to the monopoly violation) 7 would take on board the lesson of too much trust in the market. But it did not.
Second, as to research: At least since 2014 with publication of the important research paper by Ostry, Berg, and Tsangarides
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of the International Monetary Fund, and in the same year the publication of Capital in the 21st Century by Thomas Picketty, our understanding of the economics of inequality has fundamentally shifted.
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Ostry, Berg, and Tsangarides show “that greater inequality in society strongly retards economic growth.” An analysis by with Soviet-style state socialism having departed the scene, the supposed tradeoff between growth and egalitarian distribution may no longer describe anything important about the world.…Greater equality seems to be simply good for growth. Once the effects of that shift in economic thinking filter into political discourse, we’ll know the cold war is finally dead.
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Efficiency is an elastic term when we use it as the object of an antitrust system. It is common cause that antitrust systems are designed to create or preserve an economy of dynamic, competitive, and innovative firms. We do not know how to create this dynamic end result, and we agree that we should not try to engineer it. The solution of U.S. orthodoxy is to leave business alone unless the case for intervention (the case that there is unjustified accretion or misuse of market power) is very clear; and, under U.S. precedents, business is assumed to be efficient and market power is assumed to be hard to get and harder to keep. 13
The worldview of the critics is quite the opposite. They would place their bets on a diverse and competitive market rather than on incumbent firms; they would rather preserve an environment that promotes incentives of outsiders to contest markets than incentives of a monopolist to invest. Both philosophies can be found in the jurisprudence of U.S. district and appellate courts, but the balance of the U.S. Supreme Court is with the orthodoxy. 14
I am very much involved in considering good competition rules and policy in the developing world. Perhaps my unease with the efficiency gospel of U.S. antitrust led me in this direction. Surely it was not the only spur, for I am fascinated by the people and problems in the countries I visit, and I feel that I can make a better contribution in the developing than in the developed world.
One cannot help but observe that, in the developing world, efficiency and equity meet. Yes, there are also trade-offs, and there are nuanced ways to strike a balance; but in a meaningful way, where barriers to markets are high, where most of the population have been excluded from the economic life of the country, where oligarchs and their families control the cream of the economic opportunities, and where powerful state-owned enterprises occupy the lion’s share of trade, efficient moves to bring competition to the market and equitable moves to help the people engage in the market coincide.
Cartel enforcement is an easy case and not controversial in the context of this essay. It is equitable and efficient in developed and developing worlds alike.
As for merger control, the most difficult problems for developing countries are not along the equity/efficiency axis. They relate to powerlessness of developing country authorities to impose the best remedy (normally, injunction) to protect their people against power created by multinational mergers. But equity and efficiency coincide in the analysis of monopsony-creating multinational mergers that squeeze poor farmers in Africa (including efficient ones who produce at lower cost than their Western counterparts) in the name of welfare of Western consumers and producers.
Monopoly/abuse of dominance cases see the greatest divergence from U.S. efficiency/consumer welfare standards. Developing countries might wish to protect entry opportunities for people without power more than freedom of action of the incumbent—and if put to the test could probably prove that enforcement to do so is efficient for their society, both in the particular case and in terms of the effort to create an environment that best promotes incentives to compete, invest, and invent.
It is a fourth category that intrigues me the most in my work in developing countries. That is the area of competition policy beyond enforcement. It is called advocacy in the West, but it is a larger-than-life advocacy and is adjunct to nothing. In the United States, advocacy entails, for example, the Justice Department Antitrust Division’s arguing to a regulatory agency to allow or disallow a merger. 15 In Kenya, it is about identifying the most stubborn economic barriers that keep hundreds of thousands of people out of the market—restraints likely to be much more damaging competitively and personally than any private restraint; and assessing whether it is politically and practically possible to tear the barriers down. Working with the World Bank team, developing country competition authorities have had notable successes in confronting serious government and hybrid (public/private) restraints. 16 Equity and efficiency meet.
In developing countries, competition policy can make the difference between life and death, between severe poverty and a dignified life.
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It can promote opportunity, inclusiveness and, indeed, efficiency. To paraphrase
Conclusion
The old gospel of efficiency, not equity, is dead. The two pursuits can move together, in tandem, or apart. Equity can take many forms. I make two concluding observations in the context of opportunity to contest markets.
First, the more unequal and exclusionary a society, such as South Africa under apartheid, the more it may be necessary to do equity to get efficiency—let alone to do equity as moral imperative. Second, apart from historical exclusions, law tempered by a consciousness of equity to the outsider can produce not only more equity but more efficiency. Often it is the case: The outsider has the best ideas. 18
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.