Imagine, if you will, that the NBA operated under a slightly different set of rules, allowing each team to throw a limited number of punches per game at the opposing team. Teams would scramble to find the most effective ways to punch out opposing superstars, or to protect their own. They might bring on “designated punchers,” better at throwing right hooks than hook shots. Statistics nerds would try to calculate whether teams should use their punches early or late in the game, or to estimate how quickly punched players could recover. On TNT, Charles Barkley and Shaquille O’Neal would debate whether a coach should have used all of their permissible punches to deck LeBron James, or saved some punches to level his supporting cast. Taunting would be refined to an art form, as players tried to bait the other team into wasting valuable punches. Contract clauses would reward not only points, rebounds, and assists, but also a player’s effectiveness in knocking out opposing superstars. Instead of trying to raise its field-goal percentage, a successful team might be focused on punching Stephen Curry.
Some might cheer, but most true basketball lovers and many NBA players and coaches would find this rule offensive, and certainly dangerous. Yet as long as NBA competition was structured to allow a few punches a game, there would be little room for anyone to abstain. Teams that would race straight to the bottom—those best at knocking out Curry or James—would have a serious leg up in pursuit of NBA championships. Any coach or player who tried unilaterally to resist the use of violent punching would be putting their team at a serious competitive disadvantage. And those who advocated for disallowing punching would no doubt be accused of overregulating and reducing the freedom to compete in the NBA.
Absurd? Perhaps so, but this thought experiment about the NBA offers important insights into how we should structure market competition in our nation. Do the rules and incentives we design reward the winners of a race to the bottom? Or do they allow for equally vigorous competition that promotes what I have termed economic dignity: the capacity for all of us to care for family, pursue potential and purpose, and participate in the economy without domination and humiliation—not only in our roles as workers, but also as consumer and business competitors?
Consider three basic principles that ring true whether in the NBA or the economy as a whole. First, all forms of competition are structured by policy. In our current political dialogue, free-market proponents often approach any discussion of structuring or regulating markets as if it would constitute disruption of some natural state, like a child throwing a rock into a completely calm pond, creating ripples in an otherwise pure free market. Yet, just like in professional sports, the nature of competition is always driven by the rules of the game. The decision to allow or penalize punching is a choice, just like any other. Conservatives often equate less regulation with more competition, as in the Trump administration’s simplistic notion that any new regulation—no matter its virtue—can only be justified if it is paired with the repeal of two others. Yet even the oft-called father of free-market competition, Adam Smith, based his argument that the “invisible hand” of the individual pursuit of self-interest in free competitive markets will benefit the common good not on a premise of no regulation, but precisely on the crucial assumption that policy makers would structure markets to prevent their distortion or domination by governmental or private-sector monopolies.
Second, our choices are often more about what type of competition we promote than whether we will unleash or squelch it. While free-market purists argue that regulation creates less competition, often regulation determines whether competition will reward performance that promotes our values or if it will reward harmful or destructive behavior. The NBA regulates punching through technical and flagrant fouls, ejections, and fines, but this hardly reduces competition in the league. Instead, it shapes competition around who is the best at three-point shooting, play making, and defense, rather than who is best at punching Steph Curry. Whenever exploitation, misinformation, and deception are permitted in an industry, new regulations that prevent such behavior will often be portrayed by industry critics as limiting competition—but they are better seen as ensuring vigorous but fair competition. Structuring markets to reward competition principally on quality, price, and performance, and not race-to-the-bottom behavior, leads competitive actors to focus on delivering better products and services to consumers and society, without fear that dignified treatment of workers, consumers, and the environment will jeopardize their competitive advantage.
Some market purists argue that consumer standards which limit race-to-the-bottom competition are unnecessary: The market will self-correct, with new entrants pushing out the unscrupulous. Yet that theory fails in practice, both for new entrants and individual employees. If competitors show dramatic profit margins or lower prices through exploitation, that can block the economic viability of new entrants or existing companies seeking to compete on the high road. When everyone has to play by high-road rules, competition does not die; instead, it shifts, and the winners are those who excel at providing needed goods and services—or are the best three-point shooters.
Third, never structure markets in ways that punish virtuous behavior. If the NBA allowed punching, teammates and fans would see any player or coach who chose to abstain as disloyal, not fiercely committed to winning games. When the rules of competition are structured to allow such violence, Gandhi-like behavior looks like unilateral disarmament. Coaches would pull aside conscientious objectors and tell them that, while their values are admirable, as long as other teams are punching the players have no choice but to do the same.
We see parallels in market after market. Where companies can achieve lower costs and higher market share through predatory or abusive behavior that reduces social well-being and economic dignity, the companies and their employees that race fastest and farthest toward the bottom win, and those that might wish to compete on a higher ground are too often undercut and punished in the market. In 2006, before the financial crisis, there was likely little room for a virtuous mid-level bank employee to refuse to make reckless subprime loans, since the market was structured to reward his competitors and peers at his own company for race-to-the-bottom competition.
Few markets reflect all three principles for market structure as poignantly as the for-profit higher-education market, which is completely shaped by and dependent on government. Efforts to regulate for-profit schools are inevitably met with special-interest-group howls of limiting market competition, but there is no market so dependent on and intertwined with government as for-profit higher education. Half of all for-profit colleges derive more than 70 percent of their revenues from Pell grants or government-backed loans. Without those taxpayer dollars, there would likely not be a real for-profit education industry.
The only legitimate rationale for supporting a for-profit higher-education industry with taxpayer dollars would be that for-profit competition truly helps more people pursue their potential and sense of purpose, thereby increasing their economic dignity. But instead, this market has been structured to reward enrollment, regardless of results or performance. Schools are usually guaranteed payment from the federal government when a student enrolls, regardless of the institution’s quality, competence, or value. When a student is lured into enrolling in a for-profit program, the school gets paid. If that program fails to deliver any education of value, the loss is borne by the student and the taxpayers.
Sound familiar? This is precisely the formula that contributed to the subprime housing crisis. Once the secondary markets were willing to buy even the shadiest of mortgages and stamp them with AAA ratings, the actors who originated mortgages were going to get fully paid no matter what. The government might lose because it was guaranteeing investors; the borrowers might have massive debt and could even lose their homes, down payments, and credit. But once the loan was originated, the bank got paid—no risk, no skin in the game.
In the for-profit education sector, this structure led to schools competing on the basis of marketing and deception, not educational quality. In 2009, for-profit colleges spent nearly 25 percent of all revenue on marketing, advertising, recruiting, and admissions staffing, compared to less than 1 percent for nonprofit colleges. A Senate report found that to keep enrollments growing, for-profit colleges engaged in unscrupulous tactics concerning the costs, reputation, and accreditation of the school. The results? Only 20 percent of college students at four-year for-profits graduated from the institution they started at within six years, compared with 60 percent of those who attended nonprofit colleges and universities. In 2008–09, more than half of students dropped out in their first year of the program at 16 large for-profits. For-profit college students default on their student loans at nearly four times the rate of those who attend public programs.
The Obama administration started the important process of establishing a set of rules to hold low-quality institutions accountable, measuring whether their students were able to obtain “gainful” employment that would enable them to repay their student loans. This was only a first step toward refocusing competition on results that didn’t go nearly far enough, but it still proved too much for the Trump administration, which lost no time in rolling back the rules—and reopening the race to the bottom.
The current structure of the for-profit higher-education industry discourages virtue. By prioritizing enrollment over results, policy makers have ensured that executives who might aspire to put students first can only survive if they can prove to the market that they can achieve a reputational advantage. But in the absence of regulations that would produce clear and easily accessible consumer information on which schools are helping students pursue their potential, and which ones force them into horrible debt for little benefit, that sort of advantage is difficult to achieve.
Perhaps if we succeed in securing free tuition at public schools and a major expansion of slots in quality two- and four-year colleges, for-profit education will die out and the issue will become irrelevant. But if there is going to be any case for a for-profit higher-education sector, the government needs to have zero tolerance for predatory practices and punishing debt, and must structure rules and economic incentives to ensure that the winners of the fierce competition are those institutions that help their students launch rewarding careers and prioritize the pursuit of personal potential. Government must assure such high-road competition in for-profit higher education, or get out of subsidizing it altogether.
These issues are not restricted to for-profit education. Indeed, the three principles of market structure are also exemplified by the basic question: What is the purpose of a corporation? The current default assumption is that its ultimate purpose is to maximize shareholder value. Calls for a broader corporate purpose are often seen as disruptive meddling with free markets. But that’s ridiculous. After all, the very capacity to organize as a corporation—with the special legal benefit of being able to raise funds without any investor liability—is a privilege that exists solely due to laws passed by democratic legislatures. It is not a principle that is deeply rooted in our history, or even in our legal traditions. As scholars like Lenore Palladino and the late Lynn Stout, the journalist Binyamin Appelbaum, and others have noted, the idea of shareholder primacy only became dominant during the 1970s as part of the rise of free-market economic ideologies pushed by the economist Milton Friedman and others in the Chicago School.
It is a positive development that the Business Roundtable recently called for a more “modern standard for corporate responsibility” that reflects “a fundamental commitment to all of our stakeholders,” including not just shareholders but also workers, local communities, and the environment. However, we should nonetheless recognize that without actual laws requiring or at least promoting broader economic and environmental goals, corporate concern for stakeholders will be uneven and subject to the excuse that good corporate behavior will be punished because competitors can still take a lower road. Yes, there are occasionally companies like Costco that, out of some combination of corporate culture and a sense of how worker loyalty contributes to long-term market value, pay higher wages and benefits than competitors like Walmart. But only a significant increase in the minimum wage will help the workers in the much bigger pool of companies that would otherwise claim that an individual company alone raising its minimum wage would lead to competitive disadvantage.
Maximizing shareholder value also defies the principle that we should not structure markets to punish virtuous behavior. Take the case of short-termism and stock buybacks. The appropriate outrage over the level of corporate stock buybacks recently reached new heights when people learned that the airline industry, which just got a $50 billion bailout, used 96 percent of its free cash flow over the past decade on stock buybacks. That’s tens of billions spent on boosting share prices and effectively raising executive compensation, as opposed to investing in operations, or improving salaries for workers, or saving for a downturn. Worse still, when this buyback obsession becomes the norm in industry after industry, a company that seeks to do the right thing by eschewing buybacks in favor of long-term investments that promote jobs and growth is likely to be punished by short-term investors for breaking the buyback expectation.
And despite the Business Roundtable statement, as former Chief Justice of the Delaware Supreme Court Leo Strine said, if a corporate executive or board “is treating an interest other than stockholder wealth as an end in itself … he is committing a breach of fiduciary duty.” Ask Craigslist founder Craig Newmark, who was successfully sued for saying he was putting consumer service above monetizing the website. If a CEO made the candid admission in the middle of the current COVID-19 crisis that they were going to keep all their workers employed solely because they were putting their workers first regardless of shareholder value, they would be a folk hero, perhaps even the subject of a Netflix movie. Yet the precise reason for such adoration—that they explicitly did it for the welfare of the workers and surrounding community alone—would be damning evidence in a lawsuit. This is a classic case of markets being structured in such a way that virtue will not go unpunished.
The need to structure competition so that companies are forced to compete on the high road is on full display with the recently enacted Paycheck Protection Program (PPP). The $660 billion program is essentially a national exercise in throwing a financial life preserver to small businesses drowning in the middle of an unprecedented crisis. You might assume that banks—including some that signed on to the Business Roundtable statement—would not first ask who was a loyal and lucrative client before deciding who would survive this 100-year flood. Yet, without clear rules requiring financial institutions to take all applicants, even in a national crisis banks resorted to business-as-usual competition that was hardly high road. At JPMorgan Chase, wealthy clients with more than $10 million in assets at the bank received “concierge treatment,” and nearly all who applied received the “small business” loans, while one out of every 15 retail banking clients that applied for loans got them, The New York Times reported. Experts believe that roughly 95 percent of black-owned businesses and 91 percent of Latino-owned businesses have been completely shut out of the program because they don’t have strong established relationships with banks and tend to be smaller, less lucrative clients.
Or consider the consequences of how government has structured markets through antitrust law. Experts like Barry Lynn, Lina Khan, and Tim Wu have been portrayed as being outside the mainstream for suggesting that antitrust enforcement should be structured to promote values larger than consumer welfare. Yet it is entirely appropriate—based on our history, values, and desire for increased competition—to structure policies to ensure against monopolists being able to use sheer market power to dominate and humiliate smaller competitors in ways that defy our values of economic dignity. This is certainly more faithful to the experiences that motivated our antitrust laws than prioritizing price efficiency.
Ida Tarbell, the muckraker whose exposés on John D. Rockefeller helped inspire Teddy Roosevelt’s efforts to break up Standard Oil, was deeply motivated by her experience as a 14-year-old, when she saw her father’s financial ruin and his best friend’s suicide caused not by fierce competition, but by their humiliation and domination due to the sheer brute force of Rockefeller forcing those competitors to sell their operations to him at cut-rate prices. They were tactics of force, possible only because the market structure at the time permitted Rockefeller to unfairly leverage his control over what Wu has called a “key economic network” of its time—the railroads.
This example has relevance for us today. No one doubts that, like railroads, big tech companies in many ways improve people’s lives with their services. Yet our existing market rules allow them to exploit dependency on their critical digital networks and platforms to use significant pressure—not superior innovation—to dominate potential competitors. We see it when Google forces competing shopping comparison services to bid against each other for advertising slots in its dominant Google search results, giving spots to whoever will pay the most, regardless of how good the service is. We see it when Facebook secretly spies on rival social-media start-ups and tells the most promising ones to either sell out or face having their product copied. And we see it when Apple makes app developers pay a 30 percent commission for sales on its App Store and still demotes competing apps to ensure that its own products always appear first. None of these examples represent fierce competition based on who designs better products. Instead, they are about the power to force concessions due to the leverage that comes from control over a key economic network of our time.
While any new regulatory structure or set of market rules will inevitably bring forth howls that policy makers are stomping on competition and leading us to socialism, this should not obscure that the question will remain not whether to regulate markets, but what kind of markets we wish to have. Do we want a market capitalism in which financial rewards flow to those who create dignified work and invest in the dignified treatment of customers and clients, or one that is structured to drag everyone down into a race to the bottom?