If you are struggling to understand the rise of economic populism in the United States, and the resulting chasm between populists and elites, then Matt Stoller’s new book Goliath will enlighten you.
Goliath is focused on antitrust, but it tells a much broader story of the way the intelligentsia has been led, through a combination of airbrushed history and economic technocracy, into repudiating the lessons we learned from the last Gilded Age.
The Real New Deal
We remember the New Deal as being about social security and jobs programs. But it was much more than that. In response to the Gilded Age and the crash of 1929, FDR’s team sought to restructure the entire economy. They hacked off the tentacles of the original Vampire Squids, recognizing that massive corporations had a detrimental effect on small business and indeed could pose a threat to democracy itself.
But we aren’t terribly familiar with that history. Chain stores are nothing new, for example; Congress enacted fair trade laws during the Depression to rein in stores like A&P, which were driving small independent retailers out of business. And even as we confront questions about the role big tech plays in our economy today, we don’t realize that these companies are, in important ways, analogous to the big companies that antitrust regulators were wrestling with in the 1920s and 1930s.
But by the 1970s, the entire intellectual framework for discussing economic issues had changed. As survivors of the Depression aged out, newcomers rejected the lessons we had learned in the first half of the century, certain that we were more enlightened than the generations preceding us.
To be sure, this change didn’t come out of nowhere. As Matt explains, the foundations had been laid for years. But in the face of stagflation, both parties swallowed whole the mantra that consumerism should be the organizing principle of our economy. Justice Brandeis had warned against this kind of thinking:
Americans should be under no illusions as to the value or effect of price-cutting. It has been the most potent weapon of monopoly—a means of killing the small rival to which the great trusts have resorted most frequently. It is so simple, so effective. Far-seeing organized capital secures by this means the co-operation of the short-sighted unorganized consumer to his own undoing. Thoughtless or weak, he yields to the temptation of trifling immediate gain, and, selling his birthright for a mess of pottage, becomes himself an instrument of monopoly.
Consumerism prevailed all the same. Bigness was justified by being pitched as good for the consumer. The left and the right both bought into it.
The people paying the price for this shift weren’t the politicians who made the decisions, nor the elites who had been taught a varnished history. They were the farmers, who no longer benefited from New Deal protections against price collapses and couldn’t pay their mortgages when interest rates shot up in the 1980s; the farmers again, when the government gave the thumbs-up to agribusiness concentration not too long thereafter; manufacturing workers, who watched their jobs get offshored (with no magical high-paying service jobs to replace them, as economic theory had promised). As I testified before the Ways and Means Trade Subcommittee in May, the Trade Act of 1974 represented a watershed in U.S. trade policy, consciously shifting power toward multinational corporations.
Today, income inequality continues to grow, and the people who feel it the most are those who have borne the brunt of our lazy default to consumerism.
And then we’re surprised when they give up on the political system as we know it, and vote for a renegade.
Airbrushing Trade History
Matt’s book is in significant part about the law and economics movement’s gutting of antitrust law and enforcement. He does a masterful job of explaining how history has been airbrushed to lead us into taking as fact things that simply weren’t so.
The same can be said for trade.
Smoot Hawley didn’t send the country “spiraling” into the Depression, as Gary Shapiro of the Consumer Technology Association told the Financial Times. Free trade economist Doug Irwin explains that Smoot-Hawley wasn’t even “a response to the Great Depression.” (396) It was a run-of-the-mill bill for its time: “In historical context . . . the Hawley-Smoot increase was not necessarily extreme.” (390)
Irwin won’t even blame Smoot-Hawley for the decline in trade that ensued after its enactment. The bill “raised the average tariff rate on dutiable imports by about six percentage points. There are two reasons why a a tariff increase of this magnitude would have a modest effect on imports . . . .” (394) The main one is that a sizable amount of imports entered the United States duty-free and thus “the tariff had a substantial impact on dutiable imports but a modest effect on overall imports.” (395) He goes on: “[G]iven the overriding importance of monetary and financial factors in bringing about the Great Depression, the Hawley-Smoot tariff almost surely played a relatively small role in the economic crisis.” (397)
Irwin – remember, this is a free-trader – also debunks the received wisdom that Smoot Hawley caused the beggar-thy-neighbor tariff wars of the 30s. He recognizes that the bill was a “damaging development . . and contributed to the rise in protectionist sentiment in the early 1930s.” (404) But he goes on to point out that “the real collapse of the world trading system began with the failure of a major Austrian bank in 1931 . . . it sparked a chain reaction that had enormous consequences for trade policy. [It] produced a financial pain and a currency crisis” which in turn led to Britain to abandon the gold standard. Others followed, and “[w]hile there were sound reasons for Britain’s decision, it also contributed to the breakdown of international trade relations . . . [C]ountries responded by imposing higher trade barriers than against countries whose currency had depreciated.” (404-405).
The hyperbole over Smoot Hawley has reached such proportions that even the Chairman of the Senate Finance Committee has come to believe it caused the Great Depression, the rise of Hitler, and World War II itself. (The stock market crash happened in 1929. Smoot-Hawley was enacted in 1930.)
In the meantime, we ignore the real source of the Depression, and the beggar-they-neighbor policies of the 30s: bank failures. We saw it again in 2008. But we don’t want to talk about bank deregulation, as it happens before our very eyes. The oxygen is taken up with Trump’s tariffs because of what we think Smoot Hawley did in the 1930s.
This narrative certainly inures to the benefit of financiers.
The Multilateral Trading System
We have also been told the wrong story about the vision for the multilateral trading system. It wasn’t a bunch of laissez-faire tariff cuts. It was tariff cuts paired with essential conditions of competition, memorialized in the Havana Charter, to prevent corporations from having too much power – including an entire chapter on antitrust that, when compared with the pro-merger chapter of USMCA, highlights how far we’ve drifted from that vision.
Indeed, that chapter not only would have frustrated the kind of concentration we see today, but would have frustrated many of the more pernicious aspects of Chinese state capitalism. It covered both private and public commercial enterprises. All the rigamarole today about how the WTO never contemplated the kind of anticompetitive behavior to which we are currently witness rings hollow when you understand the genius of the architects of the system back then. In the words of one of the American diplomats at the time, the world faced two choices.
One leads in the direction of free enterprise and the preservation of democratic
principles. The other road leads in the direction of Socialism and state trading.
To make matters worse, we’ve been told the Havana Charter was only important because it sought to establish the International Trade Organization, not because it had disciplines on corporate conduct. The received wisdom is that an isolationist Congress refused to create an institution with that much power. Yet it was industrialists who rejected the Havana Charter precisely because it would have imposed disciplines on them, and persuaded Congress to see things their way.
The Abuse of Adam Smith
Perhaps the most disturbing airbrushing of history is the abuse of Adam Smith. Hailed as some sort of libertarian icon, his works have been selectively quoted in furtherance of that deception.
Too few realize that Smith’s opposition to tariffs – which was not absolute – emerged from his abhorrence of monopolies. In 18th century England, tariffs were used to prop up monopolies at the expense of the working class. That is what Smith sought to change, in order to improve the living standards of the working class. He would not be the least bit surprised at the recent study that found monopolies to cost the consumer about $5,000 per year.
While most associate Smith with the “invisible hand,” and thus conclude he was some sort of free-market fanatic, consider this quote, which is much more representative of his views – and much less well known:
But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected may very easily be prevented from disturbing the tranquillity of anybody but themselves.
It’s a simple notion. Corporations should not govern us; we should govern corporations.
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It’s past time to listen to the people who have been most injured by the revisonist economic theocracy we’ve been suffering under for the past three decades. Not because there’s an election coming up, but because widening income inequality is unsustainable. And, in Matt’s view, a threat to democracy, as people consider whether other forms of government will do a better job of addressing the economic woes that are the result of conscious policy choices.
This being a trade blog, I have looked at Matt’s book through the prism of trade. But for people interested in broader economic issues, particularly in light of the debate in the Democratic scrum that is the primary, there is a wealth of history and analysis that provides context for where we are today, and what we can do about it, from the impeachment proceedings against Secretary Andrew Mellon (and his “donation” of art to the National Gallery) to the rise of junk bond king Michael Milken, who pioneered the looting of corporate assets that has set the stage for the revolt on the left against private equity.
Mostly, Matt shows us that massive corporate concentration is nothing new; control of the economy by venal financiers is nothing new; and pushing back on the power of big corporations and venal financiers is also nothing new.