An interview with Tommaso Valletti, who served as Chief Competition Economist at the European Commission from 2016 until 2019. He tells us how, after moving from academic life to policy and being confronted with questions of political power and democracy, he had to take a stand. In this interview with Balanced Economy’s Nicholas Shaxson, Valletti reveals much about the rather corrupt interlocking system of monopoly in Europe, and offers ways forwards: one big, meaty solution in particular.
Counterbalance is a newsletter from a new anti-monopoly organisation, the Balanced Economy Project
Cross-posted from Counterbalance
NS What was it like moving from academia to a position of power?
TV I am an academic, an expert in industrial organisation. The academic approach is to find trade-offs, ‘on the one hand this, on the other one that, let’s do more research and gather more information.’ In the policy field, you don’t have that luxury. You have to make choices in finite time, taking risks. For instance, if you wait for ultimate proof that a mask is useful [to fight Coronavirus], it may be too late.
I saw the consultants hijack a certain way of doing economic work. They do this on a massive scale, to create doubt. They bombard you. They say ‘well, this merger could bring all these fantastic efficiencies: here is a possibility you should consider.’ You know that in practice this will not play a role, but then you have the burden of proof as an authority to dismiss those claims. It is a very dirty game.
NS: You had an awakening, how was this from a personal perspective?
TV I live in the UK, and I see all these people in position of power coming from doing PPE [Politics, Philosophy and Economics] at Oxford University or similar. They are trained in the debating societies to argue anything, and the opposite, within 5 minutes. They are very eloquent. When I first came to the UK, I thought, as an academic, ‘how interesting, how witty, how intelligent!’ But it has actually been devastating. Because economic power will take exactly those kinds of people, then put them in front of a judge, or the Commission, and they will create smoke around an issue.
These people have lost the sense of who they are. I witnessed that, and it made me re-think my own values. This is not about some narrow economics. It’s about democracy, about economic and political power.
I had avoided this for too long. I had to ask myself, after having studied markets for over two decades: what do I have to say? Where do I stand? What is right, and what is wrong? That was my re-awakening.
NS: Did a particular case or event crystallise this?
There was immediately all this negativity coming from the economic consultancies, and the law firms. Baker Mackenzie, a law firm on the side of Big Pharma, tried to rebut us. They first sent their lawyers, who were not smart enough to tackle good economists. So they hired consultant economists, but the consultants didn’t have the same tools we had. We were pretty robust.
So they escalated. They went to people in Toulouse, at Bocconi, in Bologna, paying them to come up with some second order effects, some details, to undermine our results. There were conferences, symposia, and round tables, saying how crazy we were trying to gaze into the “crystal ball” to predict the future. There were personal attacks.
Beyond these cases, economics in antitrust uses standard models, often static and with assumptions that are borderline heroic, if not just wrong. In economics, we like to think consumers are rational agents making informed choices on the best information. But this cannot be the starting point in concentrated markets. Take Big Tech as an example. The idea that you first collect all the available information on the web, then make choices, well, this isn’t how people behave. People just click on the first thing they are shown.
NS What is the machinery of monopoly in Brussels?
TV Obviously Brussels is full of lobbyists, think tanks and people who never disclose that they are working for the companies.
The gatekeepers are the law firms. Clients establish relationships with big law firms, and these relationships continue over time. The big law firms instruct the consultants about what they have to say. The economists who serve them are just useful fools.
With Dow-Dupont or Bayer-Monsanto, some of us, lawyers or economists, had to become experts in agrochemistry. We had to ask for information. There is a lot of knowledge that enforcers don’t have, especially in novel industries. But I could never talk to a scientist. Instead you would talk to a lawyer who had already filtered the information.
As another example, I was working on Qualcomm, and there were some excellent academic economists from Toulouse who had produced a model for the parties. I knew them already, and we had a meeting between peers. But any time I asked, ‘Patrick, but if you change this assumption, doesn’t it change the result in this way?’ immediately the lawyer would say ‘don’t answer that question.’ It was like a role-playing game, a preset game, in which I could not participate without talking through the lawyers.
NS Can you name these gatekeepers?
TV That’s easy. There are basically three economic consultancies: Compass Lexecon; Charles River Associates (CRA,) and RBB. There is a fringe of less relevant ones. It is very few law firms, for example Freshfields, Latham and Watkins, Cleary Gottlieb, Skadden, Linklaters, Clifford Chance and others.
Not everything they do is bad, of course. But this legal mentality has proved toxic. They will do anything for money.
NS Were there alternative powers or voices pushing back? Like small businesses, or non-governmental organisations?
TV Almost never. In a few cases, as with Google, you might have relatively smaller firms as complainants. Specifically, I never had any contact with NGOs. I was never asked. Take for instance the recent interest in monopsony, the idea that market power may have negative impacts on workers and wages. But I was never, not a single time, invited to discuss the outcomes of potential mergers or antitrust investigations with representatives of the unions. These people are completely missing. And forget about startups. They are busy innovating, they are small, lean, and hungry, working 24 hours a day: they have no clue how to lobby, they don’t have policy people.
But this bubble has recently become a little more open. In the Google-Fitbit merger, for example, Amnesty International came into the debate, privacy experts came in, beyond the usual people. This is a good development.
NS What role do the courts play?
TV The courts are independent of the Commission: you have the ECJ (European Court of Justice), the general courts. That is fine: it’s the system of checks and balances.
But there is a legalistic culture within DG Comp – the Directorate-General for Competition – which is extreme. There is stigma attached to losing cases in court, of having decisions reversed. The stigma is so bad that basically it freezes people from taking novel approaches. But you have to push the boundaries, especially with new markets, and Big Tech in particular. If you never take risks, the consequences are clear: market consolidation, and market power. If you are not losing cases in court, you are not being ambitious enough.
Also, especially in the US, the courts’ judges are trained by think tanks that teach them “The Economic Truth” with courses in simplistic economics that last 5-6 days at most. They always project the view that markets are efficient. These centres, these think tanks, like the Global Antitrust Institute [at George Mason University], and the International Centre for Law & Economics, they are funded by the Koch brothers, by the Googles and the Facebooks, they don’t disclose, and they basically brainwash generations of judges.
These centres don’t do scholarship. But they represent themselves as repositories of economics knowledge, which they don’t have. The judges cannot discriminate between what these guys tell them, and what reputable academics might tell them, also because these academics too often stay in their ivory towers. There are good academic papers published in good journals, then consultants come up and say ‘No, Professor So-And-So is wrong’, here, I have written it up.’ They produce a glossy pamphlet with three nice pages: exactly what the judge needs, he can say ‘ah, here is a counter-argument, here is an anecdote to rebut this. So, nobody knows’.
This goes on, all the time.
NS If you had to offer one big solution, what would it be?
TV Mergers are not the only problem, but they are the starting point of consolidation and possible abuses. Mergers are almost never blocked. Think of the numbers. In Europe every year there are about 15,000 mergers, mostly tiny stuff, and we let it go. They would maybe notify 400 transactions [to the Commission] every year: of these, maybe 30 go into a deep assessment, maybe 15 get some remedies, and often none are blocked.
The GAFAM (Google, Amazon, Facebook, Apple, Microsoft) have acquired more than 1,000 firms in the past 20 years, and zero of those transactions have been blocked — and 97 percent were not even assessed by anybody. These are extreme, ridiculous numbers.
During my tenure of three years I contributed to blocking the merger of the LSE (London Stock Exchange)with Deutsche Börse, Alstom-Siemens, Tata-Thyssen-Krupp in steel, and others. In almost two years since I left, we have had zero. Nothing has been blocked since I left, even Google-Fitbit.
The process has become crazy. You must create a definition of the relevant market, then calculate market shares. This will often have little to do with reality. For example, with Facebook-Instagram, the outcome of the investigation into what is the relevant market was: Online Camera Apps! You have commissioners, enforcers, consultants, debating for hours and hours and hours and hours. This burns resources.
The Chief economist team which I was heading had 30 people: that’s it. Google, Facebook, or Amazon could put hundreds of people onto every case.
So: how do we deal with this?
Well, there is lots of strong economics saying that once you are a large company, further concentration does not create further benefits. And I do take the view that big is bad, because concentration is political power, it is corruption, it is a risk to democracy. We have lost this idea, and instead the economists are enamoured with “efficiency.” If size was everything, if big was efficient, then the Soviet Union should have won the Cold War.
Let us go back to a more structural approach that we have abandoned.
When firms are super-big, I would start from the structural presumption that ‘I don’t want you, the companies, to merge.’ I block it. But then I pass you the ball. Because the authorities don’t have the information: the merging parties do. So I say – and this is the reversal of the burden of proof, which is rebuttable – ‘can you prove that this merger is the only way to bring these benefits?’
I would say “You, Google, the most almighty firm in the world, why do you need to purchase Fitbit to achieve these benefits? Can’t you do it yourself, with all the smart guys you have? And leave Fitbit on its own, or available for purchase by someone without your market power, as this will increase competition? Prove that you really cannot do it without buying Fitbit. It is beyond my comprehension. Show me.”
If you do that, the debate changes completely. They will bring the data that we never had. The conversation will still be based on evidence and facts, but you haven’t spent a zillion hours in useless, exhausting exercises, in this loop.
I am pro-competitive. I like competition. There is huge social value in good enforcement, so enforcers should also have more resources. The UK’s Competition and Markets Authority (CMA) has 600 people in a country of 60 million: but DG Comp has less than 1000 people for half a billion citizens. That can change.
NS The new antitrust movement in US is perhaps about 10 years old, and extremely influential now. But there is no comparable movement in Europe to speak of? Why?
TV There is a bad and a good explanation. The bad explanation is that unfortunately it takes money to run alternative views. There is funding for this in the U.S., but in Europe there is less philanthropy, so there is a problem with organising.
The good reason is, perhaps, that concentration in Europe is not quite as bad as in the U.S. We have had more active regulators. We have made lots of mistakes, it’s been slow, it’s been late, maybe the remedies didn’t work out, but within the available laws Europe tried to achieve something. We ran three Google cases, we opened cases on Facebook, on Amazon. Especially in the first mandate of [European Commissioner for Competition Margrethe] Vestager, she had a mandate and the energy to do new things. The second mandate of Vestager hasn’t started with the same energy, I’d say.
In the U.S., after Microsoft in 1998 you had basically no enforcement for two decades in the Big Tech space. Now, at least, there is a change in climate in the US, with the Biden Administration. They are saying good words. Let’s see if the facts change.
Since leaving the European Commission, Valletti has returned to academia.