Federal Trade Commission (FTC) Chair Lina Khan recently spoke at the Carnegie Endowment on “The Future of American Innovation.” Khan’s speech made the case that vigorous enforcement of antitrust policy is vital to ensure American businesses remain innovative.
Chair Khan describes two types of markets. The first is the competitive market, where the market is open to new and innovative business that can compete with the established firms, thus forcing the big firms to innovate or lose customers. Then there is the consolidated market, where large firms dominate the marketplace and use their power to keep all rivals out. In a consolidated market, consumers have fewer choices, pay higher prices, and rarely, if ever, have the option to try new products developed by a young company eager to knock the big companies off their perch. Chair Khan does make a good point when she says that large firms tend to become encumbered by “red tape and bureaucracy.” This makes them less likely to introduce innovative new products onto the market, although the big firms are superior to newer firms at improving existing products.
In contrast, “hungry” startups are more likely to introduce new products. However, Chair Khan ignores the ways the market disciplines large firms that become complacent without any interference from government regulators. As well as how, at least in the tech marketplace, big companies have found a way to remain innovative while growing larger. At the dawn of the 21st century, many were fearful that AOL-Time Warner would control both traditional media and the (then) new internet. Today, the AOL-Time Warner merger is remembered as one of the biggest disasters in modern business history.
Another example of a business once considered immune to competition is IBM. IBM was so powerful and profitable that the federal government launched one of the largest antitrust cases in history against the company. By the time the lawsuit was dismissed, IBM was losing market share to two upstart companies named Microsoft and Apple. Years later, Microsoft was sued by the Justice Department for trying to monopolize the internet browser market. As the case was ongoing, Microsoft’s browser was losing market share to a new, better (at least according to most internet users) version, including one (Google) created by two Stanford students.
Chair Khan would say today is different since big tech firms like Meta (parent company of Facebook, WhatsApp, and Instagram), Alphabet (parent company of Google and YouTube) and Amazon are increasing their monopolies by using their wealth to acquire successful startup companies. This is true, but far from being a threat to innovation, the possibility that a small successful startup will be bought up by a big company helps the small sets up attract investors. Thus, big tech’s strategy of “if you can’t beat them, acquire them” actually makes the tech industry more innovative. Those working for the tech companies that are acquired by a big company gain access to greater resources to help create more new products and help keep their new employer from getting bogged down in “red tape and bureaucracy.”
Chair Khan is correct to criticize government policies that subsidize what she calls “national champions," businesses whose size and function make them so important to the national government that it must protect them. Boeing is one example of how the national champion approach can cause problems. However, Chair Khan ignores the fact that the airline industry is both heavily regulated and subsidized by government. It's a less-than-small reminder Boeing’s problems can’t be blamed on the free market. She also points to the government’s failure to ensure there was more than one supplier of black powder, which is essential to make gun powder for rifles.
The Boeing and black powder cases show the folly of relying on government to, as Chair Khan put it, “shape the market.” Boeing is yet another example of why market discipline is the better way to protect consumer safety than regulators. The failure to ensure there was more than one supplier of black powder was not the fault of a private company, but the Pentagon’s procurement officials—the same people who brought us the $500 dollar toilet seat.
Chair Khan’s whole concept of national champions is an example of crony capitalism—not free-market capitalism. FTC Chair Lina Khan is right that federal policies such as government support for “national champions” creates monopolies that harm consumers, workers, and stifles innovation. However, Khan is incorrect that the solution is to increase government intervention via enhanced antitrust enforcement. The better solution is for government to not subsidize or punish large businesses, and instead let consumers, workers, entrepreneurs, and investors shape the market.
