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Antitrust and Monopoly
Anatomy of a Policy Failure
By Dominick T. Armentano
The Independent InstituteCopyright © 1990 The Independent Institute
All rights reserved.
The Legitimacy of Antitrust Policy
The competitive business process is central to an appreciation of the market economy. If competition exists in the market, business organizations tend to allocate resources efficiently, engage in innovation and technological development, and generally respond effectively to consumer demand. If competition is weak or nonexistent, however, it is not at all evident that the interplay of free market forces will automatically generate beneficial economic behavior and performance. Indeed, it is often alleged that if business organizations could extinguish the market process through monopoly or collusion, they could presumably misallocate resources and create a utilitarian justification for extensive governmental regulation.
THE RATIONALE FOR ANTITRUST
While the American economy may still primarily employ the institutions of private ownership and voluntary exchange, it certainly has never adhered to strict laissez-faire principles. The decline of the free-market system accelerated with the rise of large-scale business enterprise in the post-Civil War period. At that time, spokesmen for business interests, labor, government, and even a few economists asserted that some regulatory control of the economy was required in order to protect consumers from the "trusts" and their attendant unfair practices. Presumably, the Sherman Antitrust Act (1890) and the rest of the antitrust laws were passed in order to halt the spread of business monopoly and to restore effective competition to the market economy.
The conventional perspective on the origins of antitrust regulation is that the laws were enacted to stem the rising tide of "monopoly power." Yet revisionist analysis of the Clayton Act, the Federal Trade Commission Act, and the Robinson-Patman Act has severely shaken this conventional view; various scholars have demonstrated that these particular "antitrust" statutes were often supported and employed by established business interests in an attempt to restrain and restrict the competitive process. Unable to compete effectively with more efficient business organizations, certain special interests sought political and legislative restrictions in an attempt to secure or enhance existing market positions. According to this view, therefore, much of the antitrust movement should more accurately be seen as conservative rather than as "progressive," and as an important part of the "triumph" of conservatism in American politics.
Interestingly, and perhaps ironically, the Sherman Antitrust Act has managed to escape the revisionist assault almost entirely. It is still widely accepted as a statute whose sole purpose was to protect consumers from monopoly power, and to prevent "an artificial enhancement of prices" in the market. And while some economists can now admit that the Sherman Act has not always been employed to that end, they presumably have little doubt that its intention was to advance the general consumer welfare.
But there has always been some reason to doubt the orthodox interpretation of the origins of the Sherman Act. It is true that it was Senator Sherman's expressed intent to make illegal those business arrangements that tended to "advance the cost to the consumer," and this precise language appeared in the original draft of his bill. However, this wording was stripped from the legislation as approved by the U.S. Senate; the Sherman Act as enacted into law does not mention the alleged "sole" purpose, that is, the "enhancement of prices by combination." Moreover, at least through 1911, the legal enforcement of the Sherman Act had absolutely nothing to do with the substantive conduct and performance of the indicted corporations or, in other words, with whether there had been any "enhancement of prices" to the consumer. The courts were totally immune to defense arguments that the indicted trusts had not increased prices and had not resticted outputs — indeed, that they had lowered prices and expanded outputs — and had not restrained trade in violation of the law. Nor is there the slightest shred of evidence that the U.S. Congress, on observing that its alleged "intent" was being misconstrued by the courts, ever sought to revise the wording in the law (or the enforcement of the law) to conform to Senator Sherman's original vision. In short, reasonable doubts can be raised about the purity of the intentions of the men in government and in business at the very birth of the antitrust movement.
More to the point, as this volume will demonstrate, the Sherman Act — like its sister antitrust legislation — has been continuously employed to restrain competition and the free-market process, whatever its alleged intent. It will be shown that the antitrust laws have been fundamentally protective of the existing economic structure of business organizations. This protectionism may or may not have been the specific intent of the laws, but it is the way the laws have operated in practice.
THE LEGALITY OF ANTITRUST
While the precise intent of the antitrust laws must always remain somewhat obscure, the legality of legislation regulating interstate commerce has never really been in doubt. In the first place, the Constitution of the United States states explicitly in Article One, Section 8, that Congress has the authority and the legislative power "to regulate commerce among the several states ..." Even more importantly, repeated court decisions made it perfectly clear that the government could legally regulate the use of private property whenever it was devoted "to a use in which the public has an interest." For example, in the famous Munn v. Illinois case decided in 1877, Munn and his partner, Scott, had argued that their private grain-storage business was of no concern to the State of Illinois legislature, and that the government had no right to require them to make their rates public, to get a license to operate from the state, or to comply with maximum-price limits. A majority of the U.S. Supreme Court did not agree. Instead, the high court declared, with plenty of English common law as precedent, that the use of private property which involved the public "must submit to be controlled by the public for the common good." In explicitly utilitarian rhetoric, Chief Justice Waite argued that this interest could justify extensive public regulation.
Property does become clothed with the public interest when used in a manner to make it of public consequence, and affect the community at large. When therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good. ... He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control.
Since all private property in an exchange economy involves the public, this decision and many subsequent ones established clear legal precedent that legislatures had the authority to regulate practically any private business activity. As Justice Roberts so clearly puts the matter in Nebbia v. New York in 1934: "... a State is free to adopt whatever economic policy may reasonably be deemed to promote the public welfare, and to enforce that policy by legislation adapted to its purpose."
Actually, the ending of a strict private-property rights approach in law and its replacement with utilitarian public-welfare analysis had begun well before Munn v. Illinois. Morton J. Horwitz has demonstrated conclusively that there were dozens of important court decisions at the state level in the early nineteenth century that clearly embody the triumph of utilitarian public interest over common law property right. In the name of technological progress, for instance, the courts in some of the early water pollution cases were more than willing to sacrifice the traditional common law principle of strict tort liability in favor of a more instrumentalist concern for promoting the general economic welfare. In many instances, upstream property owners were allowed to victimize downstream owners when the public benefits associated with industrial progress exceeded the social costs, in the courts' view. Thus Munn v. Illinois and Nebbia v. New York represent the logical culmination of a philosophical change in the law that justified extensive governmental regulation of property in the so-called public interest.
THE LEGITIMACY OF ANTITRUST
While regulation such as antitrust laws have admittedly been judged legal, is such legislation proper in a free society? From a strict natural rights perspective, such regulation and legislation would not be proper. This theory holds that individuals have inalienable rights to life, liberty, and property. These rights imply the liberty of any person or persons to enter into any noncoercive trading agreement on any terms mutually acceptable, to produce and trade any factor or good that they own, and to keep any property realized by such free exchange. This perspective would hold that it is right to own and use property; it is right to employ that property in any manner that does not infringe on anyone else's property rights; it is right to trade any or all of that property to anyone else on any terms mutually acceptable; and that it is right to keep and enjoy the fruits of that effort. These activities are right because they can logically be derived from man's natural right to life and life-sustaining action. Consequently, it would be wrong to initiate force against someone else's private property; wrong to forcibly interfere with someone else's voluntary property transaction; and wrong to outlaw or regulate certain types of business contracts, organizational structures, or business cooperation. These activities would be wrong since they would infringe upon the natural rights of individuals to do with their own property what they see fit.
So interpreted, government's function in such a social system would be to define and protect rights to life and property, and to adjudicate disputes over alleged violations of rights. Government could not legitimately regulate the manufacture and price of agricultural commodities, limit the production of petroleum, prohibit the sale of labor services below certain fixed terms of exchange, or restrain the voluntary merger of private properties. Such state activities would be invasive of property rights and thus would violate the principle of free and voluntary exchange. Antitrust laws, therefore, to the extent that they restrict voluntary agreement or the exchange of private property, would not be consistent with a social system based on natural rights. Thus, part of the case against antitrust can be couched in strictly normative terms.
ECONOMISTS AND GOVERNMENT REGULATION
The philosophical position on property rights outlined above is clearly still a minority position. Many intellectuals, and certainly most economists assume that private-property rights are not inalienable or natural. They hold that such relationships are useful social conventions that governments sanction because they tend, under special conditions, to promote the public welfare. For example, if sufficient degrees of competition exist, free trade is desirable because it is said to maximize the value of social output or minimize social cost. If business monopoly or collusion exist, however, economic activity might be regulated, through legislation, in society's own interest. Because this view makes voluntary-exchange relationships conditional or dependent upon their alleged effect upon social efficiency and the public "welfare," it can be designated as the instrumentalist–utilitarian position.
Historically, almost all economists have rationalized their belief in a capitalistic market system and justified sporadic government regulation of that system by arguing in essentially instrumentalist–utilitarian terms. For example, in the first systematic economic treatise, The Wealth of Nations, Adam Smith indicted all the old regulatory economic systems, especially Mercantilism, for their economic inefficiency. Smith opposed government restrictions on production and trade because, in his view, they held down the accumulation of capital and the creation of national wealth and welfare. Removal of the restrictions and regulations would allow self-interest, regulated by competition, to produce the greatest economic good for the greatest number.
Smith did not extend his argument for free trade to all economic areas. The Wealth of Nations contains numerous examples which demonstate that Smith did not believe that private wills or interest always synthesized into the public good. And where they did not, government involvement and even regulation were clearly necessary. National defense was an obvious example, but other exceptions to the general rule of noninterference in the areas of schools, bridges, canals, roads, and the post office were even more revealing. Smith, it appeared, often qualified his general laissez-faire whenever he felt that private pecuniary interests could not, or would not, operate in the general public interest as he conceived it.
Jeremy Bentham and the Philosophic Radicals made the semiutilitarian economic philosophy of Adam Smith even more explicit. Bentham believed that the interests reflected in the private, selfish economic activities of individuals were harmonious, and created a stable economic system; that is, that a universal order was "surely and instinctively established by the spontaneous division of tasks and by the automatic mechanism of exchanges." The Philosophic Radicals supported free-market capitalism because that view of political economy extended the "greatest good to the greatest number." Government intervention, not condemned a priori, was rejected, for the most part, simply because the "hedonistic calculus" and experience had shown that its benefits rarely exceeded its costs. Thus, as with Smith, the Radicals made the question of legitimate state intervention in economic affairs a utilitarian issue: They supported economic arrangements that appeared to function in the general public interest as they conceived it.
This approach seems to have been the essential methodological and ideological position of most of the classical economists, and certainly is the position of almost all neoclassical economists. Neither Smith, Ricardo, Mill, McCulloch, Senior, Marshall, or certainly Keynes ever admitted to a belief in an undiluted laissez-faire, nor did they imply it in any clear and consistent theory of public policy. For the most part, their only guide to the important questions of legitimate governmental regulation was utilitarian: though free-market activity might be generally acceptable, the state could and should intervene whenever its duly elected, well intentioned representatives thought the intervention to be, on balance, in the public's interest.
ANTITRUST POLICY AND THE PUBLIC INTEREST
There may, however, be inherent difficulties associated with this approach to public policy. The most central observation, aside from the normative considerations already examined, is that this instrumentalist perspective may not be able to be as pragmatic or scientific as it pretends. Utilitarians and instrumentalists implicitly assume that there is some generally acceptable method to determine the precise economic costs and benefits of public action, so that the public interest might be intelligently pursued. Yet, individual costs and benefits are inherently subjective and personal; it is not possible to sum up subjective evaluations of cost and benefit for different individuals in society and arrive at any meaningful aggregate. In short, there may be no unambiguous way to calculate precisely the greatest good for the greatest number, or to determine the aggregate social costs associated with achieving any collective objective. Accordingly, there may be no scientific way to demonstrate that antitrust policy promotes efficiency in some collective utilitarian sense.
Most policy analysts would assert that this conclusion is emphatically not the case. They would argue, presumably, that there is persuasive economic theory and historical data to support the belief that antitrust policy does, on balance, promote the public welfare. And while they might admit that the empirical evidence does not lend itself to exact measurement, they would hold that the general weight of economic theory and historical fact would strongly suggest that antitrust policy — at least antimonopoly policy — is appropriate in a competitive market system.
Excerpted from Antitrust and Monopoly by Dominick T. Armentano. Copyright © 1990 The Independent Institute. Excerpted by permission of The Independent Institute.
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Table of Contents
Chapter One: THE LEGITIMACY OF ANTITRUST POLICY,
Chapter Two: COMPETITION THEORY AND THE MARKET ECONOMY,
Chapter Three: MONOPOLY UNDER THE SHERMAN ACT: FROM E. C. KNIGHT (1895) TO STANDARD OIL OF NEW JERSEY (1911),
Chapter Four: MONOPOLY IN BUSINESS HISTORY: FROM AMERICAN TOBACCO (1911) TO TELEX-IBM (1975),
Chapter Five: PRICE CONSPIRACY AND ANTITRUST LAW,
Chapter Six: PRICE DISCRIMINATION AND THE COMPETITIVE PROCESS,
Chapter Seven: TYING AGREEMENTS AND PUBLIC POLICY,
Chapter Eight: MERGERS, COMPETITION, AND ANTITRUST POLICY,
Chapter Nine: THE ANTITRUST LAWS AND A FREE SOCIETY,
Appendix: THE ANTITRUST LAWS: RELEVANT,