To see capitalism at its finest, you might have to visit Europe
When the European Union slapped Google with a $5 billion antitrust fine recently, President Trump readied his exclamation points, insisting that Europe had “taken advantage of the U.S. but not for long!”
Yet it’s possible this is just what fair, competitive capitalism looks like — and Europe is its real home.
Quietly, gradually, Europe has transformed itself into a capitalist haven, a place where profits and prices are kept in check by fierce competition among businesses, and where anticompetitive schemes are policed by active, independent regulators.
If that flies in the face of stereotype, a lot has changed in recent decades. Europe — once maligned for its intrusive state-controlled companies and harmful limits on hiring and firing — has managed to buck some of the worrisome trends threatening US competitiveness.
Income inequality, for instance, is higher in the United States than in any major EU nation. And while youth unemployment remains an issue across the EU, the typical 25-to-54-year-old in Europe is actually more likely to have a job than his or her counterpart in this country.
Indeed, across the increasingly integrated continent, Europe is encouraging competition and fighting monopoly power in a way that the United States no longer does.
Recent years have brought mounting evidence that US industries are becoming increasingly concentrated, with fewer businesses competing for customers —
and higher corporate profits as a result. According to
from researchers at MIT, Harvard, and the University of Zurich, the top four manufacturing firms control 43 percent of US sales; the top four retail trade firms control 30 percent.
What few had noticed, however, is that this doesn’t seem to be happening in Europe. According to a recent working paper from two researchers at New York University, there’s basically no sign of this growing concentration in European industries ranging from health care to manufacturing.
And it’s the same story for profits. While US companies have used their growing market power to raise prices, limit wage growth, and dramatically increase overall net earnings in recent years, profit rates in the EU have remained relatively unchanged for the last 25 years.
Of course, business leaders don’t always like flat profit rates, much less high regulation. But profits are supposed to be minimal in smoothly functioning markets, because any excess should attract competitors and force price reductions.
Perhaps the bigger concern is whether all this intervention and regulation stifles innovation — too much red tape. The NYU researchers found no evidence of this, but it is certainly true that Europe lacks the kind of globally iconic tech innovators being birthed in Silicon Valley. The missing ingredient is unclear, but it could be that the EU’s stricter rules on market consolidation make it impossible to build companies like Google and Facebook that work best on a large scale because they run on information from a massive user base.
With stiffer regulation and more aggressive antitrust enforcement, EU officials actively intervene to keep individual companies — and cartels —
from accumulating too much control. And since 2000 the EU has not only pursued more cases for anticompetitive collusion than the United States but has imposed much bigger fines.
Partly, you can chalk this up to philosophical disagreement. The United States has long had a fiercer commitment to laissez-faire, compared with what’s sometimes called the “ordoliberalism” of Europe, where governments play a role in making sure efficient markets — not “free” ones —
are the guiding issue. But the NYU duo argue that there’s more going on than was dreamt of in any philosophy.
Just as important is the institutional setup, including the fact that the EU’s regulatory agencies are more independent than those here, with greater freedom to take politically unpopular moves even if they hurt influential businesses. The EU’s Directorate-General for Competition, for instance, has similar antitrust and merger-approval responsibilities to the US Department of Justice and the Federal Trade Commission, but with a clearer separation from the world of electoral politics.
Which helps, among other things, to reduce lobbying and regulatory capture. The total amount of money spent on lobbying in Europe is half that of the United States, and while nearly 90 percent of all lobbying money in the United States comes from business, in the EU it’s more like 70 percent. Which is what you’d expect in a system with more independent regulators. Why waste money trying to influence regulatory decisions when you’re less likely to succeed?
And while you might argue (or lobby) for the United States to enhance the independence of economic regulators, there’s a reason Europe went this route, and it’s not foresight. It’s because the EU is a union of jealous nations.
Think of France sitting across from Germany at the negotiating table. While the French might be tempted to create a pliable regulatory regime which they could influence, they also have to worry that any such opening would be exploited by Germany, to France’s potential detriment. Establishing strongly independent regulatory bodies is a way to address this fear, ensuring that rivals can’t exercise undue influence.
Individual US states don’t have these same ambitions and fears — or haven’t since the early days of American history. And the result is a regulatory system more embedded in politics, with greater sway for lobbying and influence-peddling.
Recent days have proved the case, with Trump controversially suggesting that the independent Federal Reserve Board should keep interest rates low, despite its well-publicized commitment to raise them. Meanwhile, in Europe, the $5 billion fine against Google went ahead without so much as a tweet from EU commission president Jean-Claude Juncker.
So if you want to see capitalism at its best, maybe it’s time for a European vacation. Alongside the marvels and memorials, you’ll find a place where markets work better because bureaucrats are trying to keep it that way.