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U.S. President Joe Biden. Image Credit: Reuters

Since the 1980s, markets have been idealised as the only way to achieve an optimal allocation of resources. A sound economy is guided by the spirit of entrepreneurialism, not politics, because the price mechanism reliably conveys information about the value of goods and services. Buyers bid, sellers sell to the highest bidder, and all parties are well-informed, rational decision-makers. An equilibrium price is always reached, ensuring an efficient outcome. It’s a perfect world.

The real world, however, is not perfect. Market participants face transaction and information costs. Negative externalities and market failures are inevitable. Even ardent advocates of laissez-faire agree that some government intervention is sometimes needed, though the state should not do anything that will distort market outcomes.

But what if the greater distortion is coming from market players themselves? Given that today’s overlapping financial, health, and climate crises are fundamentally different from the “present crisis” that Reagan had in mind, we should consider whether it is now the market that is the problem.

The current US administration seems to think so. President Joe Biden’s executive order this month on “Promoting Competition in the American Economy” reads like a litany of market distortion and rigging. The list is long, but among those singled out are big players in the agricultural, health, financial, pharmaceutical, technological, and transportation sectors.

The executive order is an opening salvo against several problems afflicting the US economy. These include excessive consolidation within key industries; a lack of market transparency; unfair, discriminatory, and deceptive pricing; barriers to market entry erected by incumbent firms; and anticompetitive distribution practices. Among the victims are average internet users, social-media and retail-platform users, airline customers, new entrepreneurs, and a range of small- and medium-size businesses, including independent brewers and farmers.

All of these groups are being shortchanged by companies that distort the market to their own advantage. In this new environment, “buyer beware” is a hollow adage. Once upon a time, a farmer could inspect a cow before buying it. If he failed to notice that the animal was limping, that was his problem. But this kind of simple exchange between relative equals has been replaced by a highly uneven arrangement in which anonymous customers are pitted against big businesses in an asymmetric relationship that admits of no bargaining or negotiation.

Worse, the same big businesses have consolidated their dominant positions through a host of deceptive practices such as misleading advertisements, ancillary fees and other pricing strategies that impede product comparison, and measures to frustrate customer attempts to recover fees charged for services that were performed poorly.

In the finance sector, fraud, deception, and misrepresentation have long been addressed through regulatory oversight. Companies wishing to issue stocks or bonds on official exchanges must disclose information that investors need, and this compliance actively monitored and enforced.

To be sure, this system is far from perfect. In recent decades, regulators have been under-resourced, and there has been an expansion of private securities offerings. Still, the broader point stands: markets work only when everyone plays by the same rules.

Companies will always be tempted to flout the rules in order to gain an advantage. But in some sectors today, the erosion of the market principle has gone far beyond cheating consumers or hard-balling potential competitors. Pharmaceutical companies, for example, are major beneficiaries of legalised monopolies. They routinely profit from patents on innovative products derived from government-funded basic research, and regularly attempt to renew patents by simply tweaking the original compound.

But even these substantial legal subsidies apparently have not been enough for the industry. Big Pharma companies have engaged in further rent-seeking by driving up prices for prescription drugs and blocking the production or dissemination of generic and biosimilar drugs — even during the pandemic.

As for Big Tech, controlling customers and clients, and preemptively acquiring potential competitors, has become de rigueur. Dominant platforms portray themselves as pro-consumer even as they deny consumers any meaningful choice. For example, Amazon not only extracts hefty fees from retailers who effectively have nowhere else to go; it also directly competes with them.

Similarly, the major social-media companies have pushed many news outlets into bankruptcy by allowing their content to be featured without compensation. When Australia passed a law requiring digital platforms to compensate media companies, Facebook temporarily blocked Australian news links on its platform and threatened to leave the country altogether. (The company released its virtual chokehold only after reaching a deal with Rupert Murdoch’s NewsCorp, while smaller news outlets remained far from the bargaining table.)

But the ultimate prize for market distortion goes to employers. Across the board, big companies have used every trick in the book to dominate workers rather than compete for them. After decades of undermining unions and outsourcing jobs to suppress wages, employers have increasingly resorted to non-compete clauses to tie employees at all levels to the firm.

Such arrangements now apply to 28-48% of all employed people in the United States — everyone from restaurant workers to higher-level employees who have innovated and contributed substantial value to their employer’s bottom line (while being denied any claim to intellectual property they helped create). Those who try to leave are threatened with litigation, and US courts have long taken the side of employers, who remain free to fire employees at will.

These asymmetrical arrangements all smack of hierarchy, not of free markets that efficiently allocate resources, including human capital. Now that the Biden administration has set its sights on these neo-feudal practices, free-marketeers should be cheering the loudest.

Katharina Pistor is a Professor of Comparative Law at Columbia Law School. She is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

Project Syndicate