Antitrust policies and enforcement are key to raise real incomes which reinforces American economic soft power.

In the United States, real incomes have been stagnant since the 1980s, and that negatively affects American economic soft power. Soft power is the ability of civil society to attract other nations to its standard of living. There are two types of soft power: economic and cultural. American economic soft power captivates foreign citizens with the promise of a prosperous American way of life through high real incomes. In other words, it is the power of the American people to export the American Dream. Economic soft power is the driving force behind cultural soft power because it facilitates an innovative environment with financial incentives for new entrepreneurs in the arts, sciences, and technology. Professor Joseph Nye credits American jazz, rock & roll, blue jeans, Harvard University, and Hollywood with American cultural soft power. He says the Soviet Union was brought down not by a military power, but by this very cultural soft power.1 American economic soft power was at its highest peak during what is called the Harvard School of antitrust enforcement (1948-1978) policies in the 1950s and 1960s during the golden age of small businesses. The Harvard School antitrust policies set up an economic environment where many firms entered the market, increasing demand for labor which increased wages. On the other hand, the Chicago School of antitrust policies (1978-2008) that were adopted in the 1970s led to the rise of monopolies that decreased firm entry and wages. In this thesis, I look at the relationship between real incomes and firm entry (i.e., firm births minus firm deaths) to answer the following question: Does firm entry affect real incomes? First, I look at worker productivity to see if the average wage increase of the U.S. worker was justified by increased corporate revenues during the 1950s and 1960s. I also examine wage stagnation that started in the 1980s through the same framework. Second, I offer a theoretical answer to my thesis question (whether firm entry does affect real incomes) by analyzing the impacts of both the Harvard School of antitrust policies and the Chicago School of antitrust policies on firm entry. Specifically, I look at antirust policies designed to maximize market efficiency through increased competition (1950s and 1960s), and antitrust policies that seek to maximize corporate efficiency through market consolidation (since the 1980s). My theoretical analysis reveals the negative impact on firm entry by (1) collusive behaviors, (2) markups and (3) post-1978 antitrust court decisions. My findings show that over the last 40 years, antitrust policies have maximized short-term efficiencies of large corporations but have damaged economy-wide market efficiencies. The Chicago School of thought predicted non-collusion among monopolies but faltered in practice when faced with increased horizontal shareholding of American corporations and the subsequent cartelizing effects, which infringed firm entry. My analysis of markups reveals an increase in prices that defied Chicago School antitrust policy predictions, which assumed that corporate consolidations would decrease prices due to diminishing marginal costs of production. Price increases by market monopolies led to the rise in attracting capital by large corporations and shrinking investment opportunities for smaller new firms. I predict that an antitrust policy designed to maximize market efficiency through competition will increase firm entry, thus raising real incomes on working- and middle-class Americans. An antitrust policy that seeks to prioritize corporate efficiency through market consolidation decreases firm entry and real incomes. As firm entry increases, companies compete with each other, and prices are contained for fear of lost revenue. High numbers of new firms in the economy disseminate power among many market players and diminishes horizontal shareholding by market monopolies. I start my empirical analysis by looking at productivity, real incomes, and firm entry. The more productive a company, the higher the revenue, thus increasing the financial power of a company to distribute extra wealth in the form of higher wages. Since there are many factors that can affect real incomes apart from firm entry, I incorporate commonly used measures—four-year college degrees, productivity, GDP, and CPI—into my regression analysis. Background United States antitrust law, which for most of the 20th century facilitated a competitive environment for firm entry and increased per capita incomes, has allowed market concentration and the spread of monopolies since 1978.2 The number of annual startups that contribute to the creation of well-paying jobs in the U.S. has declined rapidly over the last 40 years. Increased productivity raised corporate revenues and translated into high real incomes for working- and middle-class Americans in the 1950s and 1960s. However, the same type of growth in productivity increase has not raised real incomes since the late 1970s. In the latter case, corporate surplus has been deployed toward higher executive pay and investments in mergers and acquisitions, which further consolidate corporate power. As a result, 78% of Americans live paycheck to paycheck, and income inequality is at an all-time high.3 The rise of monopolies after the Civil War devastated firm entry in the U.S. economy and prompted creation of the Sherman Antitrust Act of 1890. President Theodore Roosevelt actively enforced American antitrust law and fought relentlessly to increase firm entry, earning the nickname “Trust-buster” because of progressive regulatory reforms and antitrust prosecutions during his presidency from 1901 to 1909.4 Antitrust continued to be a major movement with the election of Woodrow Wilson as President in 1911. Wilson surrounded himself with progressive policymakers like Secretary of State William Jennings Bryan, “the Great Commoner,” who understood the daily challenges facing Americans; also Louis Brandeis, “the People’s Lawyer,” who later served as an Associate Justice of the Supreme Court from 1916 to 1939.5 Brandeis graduated from Harvard Law School with the highest grade point average in the school’s history, a record that stood for eight decades. Brandeis was the founding father of the Harvard School of antitrust philosophy. He argued that the goal of antitrust law was to increase firm entry. He reasoned that small firms were more efficient than large ones. Brandeis was aware of the economies of scale that large companies could generate, but he knew that, in practice, large companies used economies of scale to drive out small competitors by lowering prices in the short term. He believed that once competition was eliminated, large corporations used economies of scale to monopolize markets and to increase prices. Brandeis was the architect of the Clayton Antitrust Act in 1914, which established the Federal Trade Commission, an antitrust enforcement agency. President Wilson and Brandeis also were behind the creation of the Federal Reserve System, which sought to break up the New York banking monopoly and divide it among 12 regional reserve banks across the United States. President Wilson believed that “the great monopoly in this country is the money monopoly. So long as it exists, our old variety of freedom and individual energy of development are out of the question.”6 The Wilson-Brandeis antitrust movement was designed to create a competitive environment through efficient markets where giant companies were unable to monopolize industries. Literature on the early antitrust movement describes a continuous legislative fight to keep monopolies out and to promote competition. A seminal work by Philip Longman looks at the antitrust developments and their subsequent impacts on real incomes. 7 The Wilson-Brandeis movement continued through the 1930s via legislative policies like the Robinson-Patman Act of 1936, sometimes called the “Magna Carta of Small Business,” which prevented the formation of chain stores in local economies.8 Policies of President Franklin D. Roosevelt’s administration further prevented patent monopolies and provided signals to business executives regarding how they should conduct their operations to avoid violating public trust. In 1950, the Celler-Kefauver Act was passed to close a loophole in asset acquisitions involving firms that were suppliers or direct competitors, thus preventing horizontal shareholdings. These governmental policies promoted market efficiencies by promoting the creation of small firms to avoid large corporate waste and increased competition. These policies also led to regional convergence of real incomes, so that workers in St. Louis were earning as much as workers in the New York metropolitan area. This trend ended with the reversal of antitrust polices in 1978. Figure 1 shows the rising trend of working- and middle-class family income (blue and brown lines), which stagnates following 1978, the year that marked a major antitrust policy shift toward less antitrust enforcement.