Capitalism and the Antitrust Laws


Libertarians do not need to be told at length that laissez-faire capitalism and antitrust are philosophically incompatible. Capitalism is a social system founded on the principle of private ownership and voluntary exchange. Antitrust is a set of laws either restricting or prohibiting unpopular but, nonetheless, voluntary uses of private property[1]. Since antitrust explicitly interferes with private willing exchange, it is completely antithetical to the concept of capitalism.

Non-libertarians (which means just about everyone we deal with as workers, teachers, or businessmen) are not so easily convinced of the antithesis outlined above. Almost all economists, for example, have held that a capitalist economic system cannot exist without antitrust to protect it. They have accepted the notion that free-market capitalism has a fatal "flaw," an inherent tendency to eat itself up, to destroy the very essence of its own economic mechanism: business competition. And they point to the latter part of the 19th century in America as empirical proof of their theory[2].


Since Adam Smith, economists have sought to justify their belief in capitalistic economic systems by falling back on "competition." It was competition that would keep business costs and prices down and lead greedy businessmen, as if by some "invisible hand," to maximize the public's economic interest. Government intervention, not opposed in principle, was unnecessary in such situations since competition was "regulating the allocation of scarce resources."

If competition could not exist, however, or if competition tended toward monopoly, the economist's classic utilitarian defense for the free market collapsed. A truly free, unhampered market implied a market free of all governmental regulation. Yet, if the declining competition thesis was correct, a competitive capitalism was impossible unless the state itself, through antitrust legislation perhaps, sought to maintain competition. Thus those who would support capitalism were pushed into the ironical position of having to support active governmental intervention in the economy to keep it competitive—a blatant contradiction in terms. Yet almost all economists have (somehow) coexisted with such a contradiction and have held such a position on monopoly, competition, and antitrust. The intellectual support for a competitive capitalism without antitrust is nonexistent in the academic community.

Can the "conventional wisdom" and political economy of more than a half-century be wrong on this crucial issue? Of course it can. The "declining competition" thesis as outlined above has no basis in logical theory or empirical fact. The entire argument is premised on mighty assumptions that are not true. It is not true that there is an inherent tendency for competition to break down in a truly free market[3] or, accordingly, that actual business competition was declining in the latter part of the 19th century. And it is also not true, emphatically not true, that an examination of the leading antitrust cases in business history demonstrates that active governmental intervention is necessary to "preserve competition."

Those who hold that competition was declining in the 19th century have a confused notion of business competition (as will be demonstrated below) and have never studied the empirical data of that period with respect to costs, prices, outputs, or any other relevant benchmark of economic performance. And those who hold that antitrust theory is sound or that antitrust cases demonstrate the need for and justify the existence of the antitrust laws have never taken the time actually to read the leading cases in antitrust history. To "believe" in antitrust is never to have read a leading antitrust case.

While there are some excellent revisionist histories of the 19th century (see, for example, Gabriel Kolko's, THE TRIUMPH OF CONSERVATISM, originally published by Macmillan in 1963), the theory and practice of antitrust has yet to be formally challenged. This author will soon provide that challenge when Arlington House of New Rochelle, New York, publishes his volume titled, THE MYTHS OF ANTITRUST: ECONOMIC THEORY AND LEGAL CASES[4]. As a brief introduction to the more formal work, it might be interesting to explore some basic antitrust dogmas.


Antitrust theory is founded rock-bottom on an admittedly impossible concept: pure competition. If you are unfamiliar with the term, you must first forget everything that you know about real-world business rivalry, since pure competition has nothing at all to do with that. Instead, pure competition is that friction-less, profit-less, never-never land, where strange robot-like firms produce "homogeneous" products at prices that just equal the marginal costs of production and the minimum average cost of production[5].

Economists by and large rejoice at such an occurrence and agree that it is a wonderful state of affairs. For in this purely competitive situation, the firms involved would not have any "price control" or "monopoly power" by which they might "exploit" the unsuspecting consumer. Hence, consumer welfare is being "optimized" and the economy is functioning "efficiently."

Departures from this blissful state of affairs are unanimously regarded as movements away from "consumer optimality" and, accordingly, movements toward the opposite of pure competition: monopoly. As business firms get larger, as they merge perhaps, and as they begin to innovate, and advertise, and differentiate their products, and acquire locational and promotional advantages, and engage in interdependent rivalry for the consumers' dollars, they wreck pure competition and any chance at it. The market place, economists have concluded, is becoming less competitive. And that, as you may realize by now, is the sort of "competition" that was "declining" in the latter part of the 19th century!

The concept of pure competition is the most destructive "straw man" in all economics and one of the most destructive in all political economy. The intellectual charade goes something like this (and every student of economics has heard it at one time or another): the free market system would be ideal if pure competition existed; pure competition does not or cannot exist; a free market system is impossible, i.e., government regulation is an absolute necessity[6]. Enter antitrust on a white charger. A convenient and cute bit of "logic"—but absolute nonsense, and don't let your economics professor forget it or get away with it.

Pure competition is impossible in reality, and we wouldn't want it even if it could exist. The concept was conceived by the mathematically oriented classical economists because it lent itself to precise mathematical analysis. Any resemblance between the concept and reality or reality-oriented competition between flesh-and-blood firms was purely coincidental. And something that cannot exist in reality, and would not be desirable even if it could, cannot rationally be used as a "standard" to measure "resource misallocation" or "monopoly power". Yet antitrust is founded entirely on this sort of approach, and it is the only economic rationalization ever offered for antitrust activity.


The so-called empirical case for antitrust is worse—if that is possible—than the theoretical approach outlined above. A long accepted dogma in the area of governmental regulation of business is that the "classic" monopoly cases of antitrust history clearly demonstrate the need for and justify the existence of the antitrust laws. The impression certainly created by all the leading textbooks on this subject is that the "trusts" indicted in the past were (as the textbook theory suggests) actually raising prices, lowering outputs, exploiting suppliers, driving competitors from the market through predatory practices and generally lowering consumer welfare[7]. Ironically, few if any of these leading texts provide the student of antitrust with the necessary empirical information that might allow an independent judgment as to the relative conduct and performance of these "monopolies." The empirical evidence is not provided, this author has discovered, because it would completely destroy the antitrust myth and expose antitrust as a complete hoax. THE MYTHS OF ANTITRUST will reveal this information in systematic detail for all the leading cases in antitrust under all the important sections of the antitrust laws. The following is the briefest possible peek under the window shade of antitrust.

There are six leading "monopoly" cases in antitrust history. These cases involve Standard Oil in 1911, American Tobacco in 1911, United States Steel in 1920, Alcoa in 1945, United Shoe Machinery in 1953, and DuPont in 1957[8]. If these trusts were abusing consumers or competitors in the marketplace, surely the information presented at Court in these long cases would reveal such behavior.

Without exception, however, the Court record in each of these classic antitrust cases reveals no such thing[9]. All the firms involved were actually lowering prices, expanding outputs, engaging in research and innovation at a rapid rate, and not, as a general rule, employing predatory practices toward their competition. In a word, the firms' actions in the market were entirely consistent with competitive and not monopolistic behavior, and the Court's own records confirm this. Yet the student of antitrust, let alone the general student of business history, cannot become aware of these facts by reading the standard textbook approach to antitrust. As mentioned before, the standard texts conveniently do not provide such information.


Antitrust cases dealing with so-called "price fixing" are treated even worse. Economists so dislike price collusion that their hatred has blurred their objective treatment of such cases. Students are led to assume that antitrust history contains ample empirical proof that businessmen can successfully collude and raise prices above competitive levels. Actually antitrust history reveals no such thing.

The author has written elsewhere of the inherent difficulties associated with price collusion in a free market[10]. It should only be noted here that price fixing antitrust cases illustrate the theoretical argument of that article, namely, that successful "conspiracy" is impossible without government intervention. Although it may be difficult to believe, the leading price fixing antitrust cases do not involve successful price fixing.

As an illustration, take the most famous price fixing case in all business history, the electrical equipment conspiracy of the late 1950s. The case, as you may remember, involved some of America's leading corporations such as General Electric, Westinghouse, Allis-Chalmers, Federal Pacific, and many others. The charge was that they had "raised, fixed, and maintained" unreasonable prices and that they had "restrained, suppressed, and eliminated" price competition on many important electrical products.

Was there an elaborate "conspiracy" to restrain trade with respect to price competition in the industry? Of course there was. But, different question, did the conspiracy raise, fix, and maintain unreasonable prices and suppress price competition between the "conspirators"? The answer is an emphatic NO, not at all. No one can read the Hearings on Administered Prices, PRICE-FIXING AND BID-RIGGING IN THE ELECTRICAL MANUFACTURING INDUSTRY, held by the United States Senate Committee on the Judiciary in the spring of 1961, without being overwhelmed by two facts: 1) there was clear evidence of meetings among various firms to "do something" about prices; 2) the meetings were, on balance, "a complete waste of time." The firms were eventually convicted (like many firms before them) for having what the Court refers to as a "conspiracy" and not for successfully fixing prices. Firms cannot defend themselves in a "price fixing case," therefore, by arguing that the prices were not fixed; that sort of information is "immaterial" at Court in such cases.


The most exciting (and, therefore, saddest) area of antitrust today is mergers. Most economists dislike mergers, particularly large ones, since they hold the market structure approach to "measuring" competition. They mistakenly assume that the number of firms in a "market," or the relative size of the firms, is the crucial determinant of competitive behavior. Since mergers reduce numbers and increase relative size (concentration), some economists argue that they automatically reduce competition. The Courts, unfortunately, have simply adopted this cute, knee-jerk approach to merger and competition. In doing so, they have rendered some of the most blatantly absurd decisions in all antitrust.

The Brown Shoe case of 1962 is a good illustration of this argument. The Supreme Court finally ordered Brown Shoe to divest themselves of Kinney Shoes since the merger of the two companies would have, in fact, made competition more vigorous in the shoe industry. By the Court's own admission, the merger would have allowed specific economies in the sale of shoes that were likely to be passed along to Brown's customers[11]. But since Brown's competitors might then have been at a competitive disadvantage, and since the Court's myopic view of mergers and competition would not have permitted similar mergers between competitors to realize similar economies, the Brown merger had to be dissolved. Thus consumers were explicitly deprived of shoe purchasing economies because the Court, with much academic advice, thought it important to preserve the existing market structure in the shoe industry for its own sake. Absurd; yet similar decisions in similar cases are rendered almost daily.

Present merger policy is even more irrational, if that is possible to imagine. The Justice Department has argued in some very recent cases that it is "concentration in the American economy" (not concentration in any given industry or market) and reductions in "potential competition" (not actual competition!) that should determine the legality of particular mergers[12]. Although the Lower Court cases decided so far have rejected such nonsense, that such wonderland notions can be offered as serious theory is enough to indicate the present intellectual state of antitrust. Antitrust today is more of a religion, a mystical experience, than anything else; yet the juggernaut rolls on through the business system.


Is there a "monopoly problem" in the American business system? Of course there is, but it has nothing to do with antitrust. In fact the monopolistic situations in the American economy have been, for the most part, immune from antitrust anyway. I am, of course, referring to the monopoly or cartel-type arrangments maintained by the Interstate Commerce Commission, the Federal Communications Commission, the Federal Power Commission, the all too numerous state regulatory commissions, and other regulatory authorities. The cartels that these governmental agencies protect and shield from competition could not last a week without such protection; the forces of the free market would take them apart immediately. Indeed, these industries prove the very point of this article, that is, that "monopoly" is not a free market problem at all, and that antitrust does not and has not restored "competition" to the American marketplace. To end the "monopoly problem" in America, end all governmental involvement in economic affairs, including antitrust.

D.T. Armentano is a professor of economics at the University of Hartford and is the author of THE MYTHS OF ANTITRUST, to be published in Spring 1972 by Arlington House.


[1] The most important antitrust statutes are: The Sherman Antitrust Act of 1890; the Clayton Act of 1914; the Federal Trade Commission Act of 1914; the Robinson-Patman Act of 1936; and the Celler-Kefauver Antimerger Act of 1950. Under certain circumstances that may, supposedly, reduce "competition," these laws restrict attempts to "restrain trade," "monopolize," "price discriminate," engage in "tying agreements" and "merge."
[2] For a typical (and much respected) view of this position see Joseph W. McGuire's BUSINESS AND SOCIETY, McGraw-Hill, 1963.
[3] See, of course, the works of von Mises and Rothbard or, for a brief argument along these lines, see Rod Manis' "Free Enterprise and the Monopoly Myth," REASON, Vol. 3, No. 6, September 1971.
[4] Scheduled for publication in May 1972.
[5] For an elaboration of this position, see any micro-economics text or, specifically, Richard H. Leftwich, THE PRICE SYSTEM AND RESOURCE ALLOCATION, Fourth Edition, The Dryden Press, 1970.
[6] For a recent account of exactly this sort of "argument," see Milton H. Spencer's CONTEMPORARY ECONOMICS, Worth Publishing, Inc., 1971, p. 327.
[7] Probably the best selling college text in "Government and Business" courses is Clair Wilcox's PUBLIC POLICIES TOWARD BUSINESS, Irwin, 1971. See this particular text for all the distortions and misrepresentations suggested in this article.
[8] For a brief review of these cases see my article, "The Antitrust Hoax," THE INDIVIDUALIST, January 1971.
[9] For a detailed history of the American Tobacco Company and the tobacco industry prior to the antitrust case in 1911, see my article "Antitrust History: The American Tobacco Case of 1911," THE FREEMAN, March 1971.
[10] "The Inherent Weakness of Price Collusion," THE FREEMAN, January 1970.
[11] Brown Shoe Company v. United States, 370 U.S. 294. See, specifically, p. 344.
[12] See the Justice Department's argument in their recent suits against International Telephone and Telegraph's purchase of the Grinnell and Canteen Corporations. Or see THE WALL STREET JOURNAL, 6 July 1971.