PRAGMATIC, PROGRESSIVE CAPITALISM: Roadmap to a Remarkably Successful, Uniquely American Political Economy From Brandeis to Stiglitz & Beyond the 2020 Election Mark Cooper Director of Research August, 2020 1620 Eye Street, NW, Suite 200 | Washington, DC 20006 | (202) 387-6121 | ConsumerFed.org PART I: REINTRODUCTION 1. PURPOSE AND RECOMMENDATIONS 1 Reform of Regulation and Antitrust Takes Center Stage Understanding the Remarkably Successful Uniquely American Political Economy of the Second Industrial Revolution Summary of Recommendations Outline 2. FROM BRANDEIS TO STIGLITZ AND INTO THE 2020 ELECTION 7 A Bridge from Brandeis to Stiglitz and The Terrain of the Contemporary Debate The 2020 Debate Over Political Economy Recognizing the Importance and Limits of Competition and Markets PART II: THE BRANDEIS PROTOCOL FOR PRAGMATIC, PROGRESSIVE CAPITALISM 3. THE ECONOMIC, SOCIAL, AND LEGAL BASIS FOR REGULATED COMPETITION 16 Brandeis Sources 100 Elements of the Brandeis Protocol Process: The Hallmark of Pragmatism Lawyers, A Profession Gone Astray 4. THE PRAGMATIC, PROGRESSIVE MIDDLE: THE SECOND NEW DEAL 25 Regulated Competition A Progressive Constitution Antitrust as an Instrument of Progressive Capitalism Policy Practicing Political Economy: Pragmatic, Progressive, Democratic, Market Capitalism PART III THE STIGLITZ MODEL OF PRAGMATIC, PROGRESSIVE CAPITALISM IN RELATION TO CONTEMPORARY ECONOMIC THOUGHT 5. THE STIGLITZ MODEL 35 The Continuity of the Pragmatic, Progressive Capitalist Model The Pivotal Role of Progressive Policy in the History of Industrial Capitalism Pervasive Market Imperfections: Two Dozen Nobel Laureates Market Imperfections and the Challenge for Political Economy in the Stiglitz Framework 6. ANALYSIS OF IMPORTANT SECTORS AND PROCESS 48 The Financial Sector National Innovation Systems Why Nations Succeed Pragmatic, Progressive Capitalism | Consumer Federation of America ii PART IV: THE SUPERIOR PERFORMANCE OF PRAGMATIC, PROGRESSIVE CAPITALISM 7. AN ECONOMETRIC EVALUATION OF ECONOMIC PERFORMANCE: 60 FREE MARKET FUNDAMENTALISM V. PRAGMATIC PROGRESSIVE CAPITALISM Periodization and Variables Economic Performance Periodization, Elections, and Shifts in Policy 8. PROGRESSIVE CAPITALISM IN AMERICA: 68 THE GREATEST HALF CENTURY THAT EVER WAS It Was Entirely the Result of Half a Century of Progressive Capitalism: Reinforcing the Econometric Evidence Evidence on Missing Factors: Social Protection, Innovations, Finance, and Competition Conclusion PART V: CRAFTING PUBLIC POLICY TO PRESERVE THE BENEFITS AND PREVENT AND THE ABUSE OF DIGITAL TECHNOLOGIES 9. THE NEW CHALLENGES OF DIGITAL TECHNOLOGY 81 The Urgent and Complex Need for Policy The Structure and Challenges of the Digital Revolution in Communications Another View The Dilemma of Economic Transformation is Intense and Obvious 10. ANTITRUST AND REGULATION FOR THE DIGITAL AGE 94 Complexity, Challenges and Core Principles Antitrust Struggles with Complex, Behavioral Regulation Regulation: Enduring Principles for a New Big Data Platform Oversight Agency 11. “DOS AND DON’TS:” BUILDING GUARDRAILS AND GUIDANCE 107 FOR DIGITAL COMMUNICATIONS Oversight in Necessary and Justified Dual Jurisdiction is Crucial Avoiding the Extremes: Utility-Like Regulation and Horse and buggy Competition Antitrust Agencies, particularly the FTC, are Ill-equipped to Control Abuse of Big Data Bottleneck Market Power BIBLIOGRAPHY 123 ENDNOTES 130 Pragmatic, Progressive Capitalism | Consumer Federation of America iii PART I REINTRODUCTION Pragmatic, Progressive Capitalism | Consumer Federation of America 1. PURPOSE AND RECOMMENDATIONS REFORM OF REGULATION AND ANTITRUST TAKES CENTER STAGE A House Antitrust Subcommittee hearing on July 29th appears to have been “a rout in favor of the anti-monopoly movement” and reflects ongoing efforts to “get Republicans on board with sweeping updates to U.S. antitrust laws.” The Washington Post editorialized that getting involved… to consider whether antitrust doctrine needs an update in the digital age, when big data shows skews what regulators thought they knew about pricing, and when unforeseen and often immeasurable harms may arise from the concentration of too much control in too few hands… Is a worthy task.”1 While the Washington Post applauded Congressional hearings, it cautioned that “the line- drawing between good business and bad behavior may not be as easy as legislators make it seem… They must take care that… remedies address clear and concrete injuries – and that they don’t cause new ones.2 The complexity of the situation is quite clear in the finger pointing about how we got into this mess:3 The antitrust laws, lax enforcement, courts applying a discredited theory that gives all the benefit of the doubt to efficiency claim The uncertainty over causes interacts with the uncertainty over remedies: a radical antitrust approach that breaks-up all the dominant digital firms with little regard for efficiencies of integration or a more nuanced approach that recognizes and seeks to regulate platforms to prevent abuse while capturing some of their large efficiencies? This paper seeks to shed light on both the challenges and the remedies by taking a view that looks at the history of how the U.S. met a similar challenge well over a century ago. The premise is that there is a great deal to be learned from history in the work of one of the leading reformers of the U.S. economy early in the 2nd industrial revolution – Louis Brandies – and linked directly to one of the leading advocates of reform at a similar moment in the 3rd industrial (digital) revolution – Joseph Stiglitz. Their analyses, unified by a clear message, are applicable to the contemporary debate, teaching that, while free market fundamentalism will fail,4 so too will socialism. “Too much” capitalism is as bad as “too little.” Pragmatic, progressive capitalism, which both Brandeis and Stiglitz advocate, is the key to striking the balance. The challenge posed by the digital revolution at its quarter-life crisis (critical juncture, turning point), is great, but the U.S. has already developed a model that worked in the past and can work in the future. Pragmatic, progressive policy to govern the capitalist economy is, once again, vitally necessary to create and sustain the conditions for market success. Pragmatic, Progressive Capitalism | Consumer Federation of America 1 UNDERSTANDING THE REMARKABLY SUCCESSFUL UNIQUELY AMERICAN POLITICAL ECONOMY OF THE SECOND INDUSTRIAL REVOLUTION Part II describes the Brandeis Protocol for progressive capitalism as it evolved over his half-century of active involvement in public policy In a half decade, the U.S. adopted the two pillars on which a uniquely American and remarkably successful political economy was built – the Interstate Commerce Act of (ICA)1887 and the Sherman Act of 1890, These two were quickly extended to the telecommunications sector, which is very much at the heart of the contemporary debate, with the Mann-Elkins Act of 1910 (extending the authority of the ICA to telecommunications), and one of the first consent decrees entered into by the Department of Justice, DOJ v. AT&T, 1913. These laws were pillars of the American political economy and demonstrate key aspects of the Brandeis approach. I call this approach the Brandeis Protocol, which is made up of 100 progressive policies. These were developed in two periods of his long political life – (Chapter 3) before he was appointed to the Supreme Court (roughly 1880-1916) and (Chapter 4) his quarter of a century on the Court (1916-1938). The longevity and durability of Brandeis in defining economic policy reflected his: commitment to decentralized competitive markets, recognition that both regulation and antitrust were necessary to regulate competition belief in economic efficiency (i.e., scientific management) nuanced and flexible view of economic policy, acknowledgement of real-world development within the economy, acceptance that there would be a pragmatic process of refinement of these initial steps, belief that the nature of the economy demanded industrial democracy based on a proper recognition of labor’s role in production, and the commensurate wages and working condition that would lay the basis for participatory democracy, and the achievement of key social goals including consumer protections, free speech and privacy. If this all sounds thoroughly modern, there is a simple explanation: it is. Part III explore the direct link between Brandeis Protocol for and the Stiglitz model of pragmatic, progressive capitalism. Chapter 4, highlights the fit between the Brandeis Protocol and the Stiglitz model. This should not be surprising, since Brandeis was a primary architect of the late (second) New Deal that Stiglitz shows led to the “Golden Age Capitalism,” the quarter century after World War II. Chapter 5 shows that the resulting Brandeis-Stiglitz model of pragmatic, progressive capitalism is consistent with and well-grounded in, a number of analytic frameworks that are “popular” in contemporary economics. In offering the pragmatic, progressive capitalist model as a basis for learning about how to respond to the challenges of the 3rd (digital) industrial revolution, it is important to show, as Part IV does, its success in responding to the challenges of the 2nd industrial revolution. In Pragmatic, Progressive Capitalism | Consumer Federation of America 2 Chapter 6, I show the superiority of pragmatic, progressive capitalism’s superior economic performance using an econometric analysis.