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Antitrust as a Barometer of Big Government

Over its history, antitrust law has provided a good measure of the changing views of the relative beneficence of the market and the state. When the market enjoys social respect, antitrust law has a circumscribed focus, both because the market is thought to discipline itself, and because the state is understood to have trouble figuring out when it can do better. But when the body politic becomes disenchanted with the market and enthusiastic about the capacity of the state, antitrust advocates enlist judges and bureaucrats as a roving commission to make the world a better place.

The pro-market view dominated the early era of the Sherman Act in the late 19th century and holds sway today. But between these eras, antitrust became a tool of big government. And sadly today, this pro-government model has again become popular not only with the left but also with some on the right. This stirring suggests trouble ahead not only in competition law but for friends of liberty and limited government more generally.

The two most important components of antitrust laws are restrictions on restraints of trade among competitors and on monopolization by single firms. The early years offered some excellent opinions that discovered the appropriate limitations on the scope of both antitrust law and the discretion of those who would enforce it. In Standard Oil v. United States, Chief Justice Edward White argued correctly that the prohibition of monopolization applied only to anti-competitive conduct by monopolists. It did not attempt to outlaw monopolies or what White called “monopoly in the concrete.” In United States v. Addyston Pipe & Steel Co., William Howard Taft, sitting then as circuit judge long before he became President, held that even competitors might make agreements among themselves if they could show these agreements contributed to efficiencies. But he also held that the judges nevertheless had no power to bless such agreements on the grounds they created reasonable prices, because judges would then be on “a sea of doubt.” Taft understood that the market itself was an information system that no bureaucrats, including those in black robes, could replicate.

For decades, beginning in the 1920s, antitrust law became much less sensible. Woodrow Wilson defeated Taft in the election of 1912 and one of his Supreme Court appointments was Louis Brandeis, a jurist who embodied the progressive confidence that government could know better than the market. In the Chicago Board of Trade case, he upheld a price agreement between competitors without showing it was necessary to productive efficiencies. Worse, he suggested that competition was not defined by a baseline of the free market, but instead by the government’s view of all the facts and circumstances of an industry. This opinion shows that it is a mistake simply to understand the progressive view of antitrust as one that always rules against business. What fundamentally distinguishes Brandeis from Taft instead is the former’s confidence that he can tell whether businesses are providing the appropriate price and quality of goods. The arrogance of his opinion is captured by the extraordinary fact that he dismissed the government’s claim of price fixing without even remanding it to the lower courts for fact-finding.

In the New Deal era, courts also began to effectively hold that monopoly power was itself a basis of liability. In United States v. Alcoa, Judge Learned Hand, himself a progressive, suggested that monopolists should be condemned unless they could show that monopoly had been somehow thrust upon them. This perspective undermined the rewards for business innovation. Antitrust reached its nadir, as with so much of law, in the Warren Court. In the Brown Shoe case, Chief Justice Warren condemned mergers of small shoe companies on the idea that he could foresee a trend in consolidation. Brown Shoe embodies judicial hubris in competition law as much as any Warren court decision in constitutional law.

Today, however, the Court’s antitrust jurisprudence is sounder than its constitutional law jurisprudence. In Verizon Communications v. Trinko, Justice Antonin Scalia wrote a hymn to the virtues of permitting businesses to seek a monopoly, because that pursuit encouraged innovation and skill to the benefit of consumers. Scalia implied that these animal spirits are the lifeblood of the economy. And this opinion commanded a unanimous court. Justices Stephen Breyer and Ruth Bader Ginsburg subscribe to the pro-market model of antitrust more than the justices they replaced.

Outside the Court today, however, ominous signs are gathering that the pro-government model is making a comeback. One of Elizabeth Warren’s leading campaign ideas is to break up the big tech companies, requiring them to serve only as platforms for others’ products. For instance, Google could not promote its own maps or Amazon could not sell its own products. Warren is returning to the view that monopolies should be condemned without requiring proof of bad conduct.

The dangers of this view are twofold. First, it reduces incentives to innovate, because companies cannot be sure of fully reaping the rewards of their investments. It might be argued that this is not a problem, because surely even if broken up, the founders and early shareholders in these companies will have done well. But that is a mistaken perspective. Tech is a very risky business. For every Google and Amazon, there are hundreds—if not thousands—of tech ventures that have gone nowhere. Without the prospect of great risk-adjusted returns, tech entrepreneurs would go into safer lines of work (like being a professor). Venture capital would also invest in less risky companies.

Second, breaking up these companies is easier said than done. The government lacks the knowledge to create new firms that will work well. For instance, it may well be that if Google apps are spun off they will lose important synergies from research. If Amazon cannot be permitted to get into the food industry by buying Whole Foods, opportunities for shaking up the complacent grocery business will be lost. That point is not speculative: other large grocery companies lost market capitalization when Amazon bought this small toehold, because their investors feared that a newly invigorated Whole Foods would undermine their business model. Government divestiture will not only destroy value, but decrease competition.

This sorry history of antitrust law progressivism may understate the dangers of its revival. We live in a world of great technological acceleration spurred by ever increasing power of computation. As a result, it is even less likely that monopolies will be able to entrench themselves. IBM was thought to have a monopoly before it ceded primacy to Microsoft, which in turn has lost its place to Google as the gateway to computation. And technological acceleration also makes it harder for governments to figure out what new business practices are exclusionary and what are not, let alone how best to break up companies in an ever-changing technological landscape. As a result, faith in bureaucratic judgement to replace the market is less justified than ever before. Progressive antitrust in the 21st century would thus be even more of a mistake than it was in the 20th.

Reader Discussion

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on November 07, 2019 at 11:17:55 am

"As a result, it is even less likely that monopolies will be able to entrench themselves. IBM was thought to have a monopoly before it ceded primacy to Microsoft, which in turn has lost its place to Google as the gateway to computation."

And here is where government tries to thwart economics. There never was a monopoly in the economic sense of one supplier of a non-rivalrous good that ever existed without the explicit approval and protection of government.

Even theoretically if an economic monopolist freely arose in some market, it would forever be a slave to its own consumers! It would be forced to continually innovate and keep its prices just above its costs of production in order to keep out competitors for its consumer base...

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OH Anarcho-Capitalist
on November 07, 2019 at 11:35:33 am

Interesting history of "progressive" tacks and turns on antitrust.

However, as with all History, things need not have turned out as they did, nor may similar present episodes turn out as have in the past, re: breakup of standard Oil = resulted in even greater wealth and power to Rockefeller AND continuing decline in the price of petroleum products.

Also:

"If Amazon cannot be permitted to get into the food industry by buying Whole Foods, opportunities for shaking up the complacent grocery business will be lost. That point is not speculative: other large grocery companies lost market capitalization when Amazon bought this small toehold, because their investors feared that a newly invigorated Whole Foods would undermine their business model. "

Gee, how innovative can an industry be that in a GOOD YEAR nets only 3% return. The grocery business survives on such meager profit margins and you expect that it will be innovative. With what monies is it to do this?

Recent media reports indicate that in the very areas where American food is produced, there is an alarming dearth of - wait - you guessed it - grocery stores; these having been driven out by larger corporate operations, which themselves are operating on 3% margins. Again, how innovative can they be?

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gabe
on November 07, 2019 at 16:58:02 pm

With all due respect, I believe Professor McGinnis's focus is too narrow. The issue is not simply a tug-o-war between functioning markets and government, but also the distortion of markets by government and by market participants. Government influence on competition is not limited to anti-trust laws; it also affects competitive outcomes by such mechanisms as intellectual property laws, tax breaks, licensing and "certificates of necessity." Day-to-day consequences of the regulatory state can be tweaked to the advantage of one market participant and the detriment of others. The issue, in my opinion is that government must maintain a functional balance between the various forces it brings to bear on competitive activity, and that it is less capable of doing so the larger and more intrusive that it becomes.

Obviously we need regulatory agencies. However, we should not assume that this necessity abrogates or even minimizes the potentially deleterious and unintended effects that regulation may have in an otherwise competitive commercial space. Pharmaceutical companies that extend patent protection for an aging compound by simply combining it in some way with another agent, or delivery compound. is one such example.

Moreover, the issue is not whether Amazon buying Whole Foods may make the grocery industry more competitive and spur innovation and efficiency. It is rather the possibility that Amazon buying Whole Foods may distort the market, through commercial, technological, regulatory, political, or other mechanisms so as to make it difficult or impossible for other companies to compete, or find new efficiencies. As Glenn Reynolds pointed out with regard to social media companies, the anti-trust laws do not merely proscribe monopolies but also collusion among large and economically powerful companies. Such collusion (as in the past between General Motors, Firestone and Standard Oil) may not only achieve commercial advantages, but also leverage political influence as well.

It is possible that "when the body politic becomes disenchanted with the market," it is not disenchantment with the idea of markets, but rather the distortion of markets that deprives society of their benefits.

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z9z99
on November 09, 2019 at 10:50:49 am

Monopolies of any kind turn harmful. Even quasi public monopolies like utilities. The old common law adage that 'the law abhors monopoly' applies equally today as the day of the Monopoly case. Competition is the heart and soul of true commercial wealth and progress, the type that promotes not inhibits freedom. And that is accomplished by neither government oversight/control nor private monopoly, particularly if suitable and adequate private remedy available.

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gdp
on November 09, 2019 at 12:26:35 pm

Yep!
Re: amazon

Comes news today that amazon if facing "anti-trust" charges based upon its (near) compulsory requirement that "sellers" must use Amazon Logistics.
Distortion of the market, anyone?

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gabe
on November 09, 2019 at 12:40:13 pm

"Monopolies of any kind turn harmful."

My above comments on amazon "logistics" notwithstanding, we must recognize that monopolies *may* turn harmful as their ultimate end state.
Consider the case of Standard Oil. John Rockefellers aggressive yet, at the time. legal strategy of acquisition of competitors (which incidentally did not impoverish those competitors but rather enriched them, had an immediate and sustained beneficial impact upon pricing for the consumer. From a "market price" of $1.00 / gal, Standard brought the price down to a little over $0.01 / gal. size did matter. Indeed, there are some economists who are presently advancing the thesis that modern global competition requires scale and that only the larger organizations are capable of taking advantage of such scale. Debatable, yes!

It may be that monopolies evolve through stages with the early stage providing significant benefit to the consumer; lest, how else would they acquire the large customer base and market share. Later they MAY employ tactics / strategies that may be anti-competitive. We will never know in the case of Standard Oil as it was broken up. We will also never know if, given the threat of Russian, yes, Russian competition in the oil markets if Standard Oil would have remained a) dominant, b) the price leader or c) if it also would have engaged in predatory behavior, price fixing etc.

No, I suspect that Z9 (above) has it right. Government must not wield its awesome regulatory and prosecutorial powers indiscriminately but rather should strive to provide a balance between market power, competitiveness and consumer welfare.

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gabe
on November 11, 2019 at 06:47:47 am

Separation of powers - wisdom from the ages. The thought being that long history has demonstrated the danger of concentration of power in any area of our common lives, political/cultural, commercial, personal, religious.

We are, so to speak, "only human"; in other words subject to wrongdoing and worse. Much worse. Read history! - as I am certain everyone here does. Great goodness may prevail over great evil but at a truly terrible cost. Why risk it?

Except for a few, human beings are not pure or cannot remain pure in motive and cannot manage concentration of power.

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Latecomer

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.