Antitrust: Free-Market Dilemma

A distinguished British scholar questions an American institution

If free enterprise is a good thing, isn't it even better for the law to ensure that it runs smoothly? Shouldn't the framework of law required to protect people's freedom of enterprise, to protect each free person from force and fraud, be expanded so as to protect people also from the antithesis of free enterprise and competition—from monopoly?

After all, the hallmark of a free-enterprise system is that producers must compete with one another to win the business of consumers and are thus not the masters but the servants of those consumers. And if this is a happy arrangement, it would seem utterly benign, even imperative, to have laws that would force producers to be the servants and not the masters of consumers—or laws, at any rate, that would at least smile upon competition and scowl upon monopoly.

This is the view that, traditionally and for quite a long time, free-market economists tended to have. It is the view that I was brought up on. It's what I was taught by free-market economists in England, some of whom were amongst the most distinguished in the world.

Indeed, they often asserted that the zip and zing, the vigor, of the American economy as compared with the less vigorous economies in Europe was to a considerable extent the result of the fact that the American people in their wisdom had understood the true nature of this combination in the free-market economy of freedom plus a framework of law. And thus, by devising a body of antitrust law—the Sherman Act and the Clayton Act and the Federal Trade Commission Act, etc.—the American people had fashioned the most vigorous economy in the world, and the British, the Germans, and the others should follow them. This was so much the received wisdom after World War II that in fact both the British and the German governments set about doing this, and they too have produced rather embryonic antitrust systems.

THE DEMISE OF AN IDEA

I believed all this. But I've now been teaching antitrust law in this country for quite some time, and the closer I have come to it the more have I been driven, ineluctably, to the conclusion that the antitrust system is counterproductive in the context of the framework of law required by the free-enterprise system. That it does not protect competition; that in fact it injures competition. That it does not protect and serve the interests of free enterprise; on the contrary, it injures it. That it does not destroy untoward, undesirable monopoly; that what it actually does and tends to do more and more is to set up a fiction, a strawman which it calls monopoly, and then it bowls that strawman down and in the process does harm to the efficiency of the American economy.

Whereas a generation or so ago most economists who supported free enterprise took the view that I was brought up on, they are rapidly changing. What is likely to arise pretty soon is a clear cleavage of opinion between, on the one side, economists and to some extent businessmen—businessmen hurt by the antitrust system—and, on the other side, lawyers, politicians, and bureaucrats. Because lawyers, politicians, and bureaucrats have a very large investment in the antitrust system, which they're not likely to let go very easily. This is a conflict which I think is going to become a very heated one and one that all libertarians, at any rate, ought to watch with great interest and possibly bated breath.

History itself partly accounts for the waning fortunes of the view that the vigor of the American economy can be traced to the antitrust system. First of all, the inventive Yankee, the go-getting American businessman, were famous characters long before 1890, when the Sherman Act was passed. And second, the antitrust system was not vigorously enforced for many years after 1890, and then there were interludes when it was and then it wasn't. And yet, of course, the American economy for a long time—no longer now, and partly because of the antitrust system—but for a long time was indeed the most vigorous free-enterprise economy there was. Thus, historically it isn't true that antitrust law was the ingenious American ingredient of a successful economy.

But it has also become increasingly clear that it's not true conceptually. If we look at the antitrust system as it has developed and as it has been construed by the lawyers and applied by the courts, we find plenty of evidence that it has been the enemy of freedom of enterprise and the enemy of the competition that formally it is supposed to protect.

And this raises a really important question: Is this because the antitrust system was ill-drafted or ill-understood by judges who don't know anything about economics? Or is it because inherently it has to take the baleful character that I suggest it has taken? That's the really fundamental question. But before taking up that question, let's consider the evidence that it is harmful to enterprise, harmful to the efficiency of the economy, harmful to freedom, harmful to competition.

The guts of the antitrust law are to be found in sections 1 and 2 of the Sherman Act, section 2 of the Clayton Act as amended by Robinson-Patman, and sections 3 and 7 of Clayton. I'll leave Sherman (1) for the end for the moment, because that is that part of the antitrust system where my indictment may conceivably be rebuttable and may conceivably have less force than in all the other cases.

GUILTY OF BEING GOOD

Sherman (2) makes it an offense to monopolize or to seek to monopolize any field of business—interstate business, of course. (All commerce, however, is now treated by the courts as interstate commerce. It's almost impossible for any commerce now—even a hamburger stand—not to be treated as interstate commerce.) And how has this been understood by the courts, and possibly still more in the active intervention now promoted by the Justice Department and the Federal Trade Commission? (While the FTC doesn't deal with the Sherman Act, it does handle certain other matters, mostly the Clayton Act, which impinges upon Sherman (2).) The activities that have been found illegal under Sherman (2) are activities that superficially could be held by unschooled judges to fall within the rubric of seeking to monopolize a field of business but in fact are innocent and beneficent.

Let's take, for example, the most notorious case of all, Alcoa. In 1941 a District Court dismissed the government's antitrust case, amounting to some 140 charges and allegations, against the Aluminum Company of America. The government appealed, and in 1945 Alcoa was found guilty of monopolization of the aluminum ingot market in the United States. It was the most ludicrous judgment that you could possibly have handed down from an august American court, and by a judge of the highest distinction, Judge Learned Hand, who completely misunderstood the matter before him.

Alcoa was found guilty of an offense under Sherman (2), not because it used any nefarious practices, not because it engaged in predatory pricing, not because it did any of the things that John D. Rockefeller's Standard Oil Company was found guilty of in 1911 or the American Tobacco Company was found guilty of, partly falsely, in 1911. Alcoa was absolutely innocent of any kind of nefarious practice, but guilty only of this: of, by the court's own admission, being so efficient and, better still, so prospectively efficient that it was able to have what is called a monopoly. That is to say, if you measured it in one way Alcoa had 90 percent of the aluminum market and another way 66 percent of the aluminum market, although if you measured it in a third way it was only 30 percent.

Now either of the first two measures might have justified calling it, loosely, a monopoly. But it was that precisely because it delivered the goods to the American people—without the faintest hint of any kind of nefarious practice—and above all it was so efficient that it forecast future demands quicker and better than anybody else could and therefore nobody else succeeded in displacing its position in the market. Of course, later, it's true that two big competitors, Reynolds and Kaiser, did come up. But at that stage, they weren't there. This, Judge Hand discovered strangely, utterly strangely, was an offense against Sherman (2).

The United Shoe Machinery case, decided in 1953, was another ludicrous case. The ruling of Judge Wyzansky was not quite so obviously ludicrous as the position of Judge Hand in the Alcoa case, but as soon as you really look under the surface you'll find it is in fact on a par with it. The United Shoe Machinery Company, again, was what it was because of its marvelous efficiency, because it supplied the shoe industry with its needs for machinery optimally, because in fact every shoe manufacturer in the country regarded it as his great friend, as his great efficient supplier. But nevertheless, because it operated according to certain leasing agreements instead of sale agreements, and because Judge Wyzansky came to the conclusion that the peculiar character of these agreements forestalled competition from others, therefore it was guilty.

ECONOMICS IGNORED

There are lots and lots of other cases that show all the economic errors, fundamental economic errors, that the courts in this country have been guilty of in dealing with Sherman (2). And it continues to this day. Not long ago, for example, a case was initiated against Dupont for having acquired 40 percent of the market in titanium dioxide, a pigment chemical. It has done it very quickly because of its efficiency, because in fact it has satisfied the demands of the consumer better than any other chemical company. But that very process makes it suspect, terribly suspect, to the mandarins of the Justice Department and, in this case, of the FTC.

The interesting thing is this: in all these cases, the classic indictment of the monopolist is forgotten by the courts—even forgotten in the construction of Sherman (2). An essential part of the classic indictment that the economists have always leveled against the monopolist is not merely that he raises prices because of his monopolistic power but that he reduces supply. He cuts back supply to a level lower than it would be in the so-called purely, or perfectly, competitive situation. Yet in these cases, these criminals who have been indicted and found guilty of contravening Sherman (2) have achieved the percentages of their markets precisely because they did the opposite. They did not cut back the supply. They increased it and satisfied the requirements of the consumers accordingly.

Why is that aspect of "monopoly" completely forgotten? Because the administrators and to a large extent, regrettably, the judges in this field have fixed in their minds now a mechanical measure of what is illicit, and that is a percentage of concentration. If you find that in the widget industry, the top four companies control 60 percent of that industry, that's bad—prima facie, obviously, ipso facto, per se! It's bad. Must be. And it's got to be broken up.

Now Alcoa and United Shoe Machinery would not have been so big if they had not been so efficient. But if they had been much less efficient, would it have meant actually better competition or any real competition? Of course not. They were the successful competitors. And they were not successful competitors because they had what is called monopoly power; they had the concentration because of their success as competitors.

Regrettably, this idea that concentration is itself, ipso facto, bad has captivated the minds not only of the public but of legislators and the courts. Yet what I am saying is not a defense of bigness, and it's not a defense of smallness, and it's not a defense of medium size. The public tends to get its mind perverted and debauched by slogans such as "small is beautiful." But, of course, any intelligent person knows that small is beautiful, big is beautiful, medium size is beautiful; all effective sizes are beautiful and all ineffective sizes are ugly. And that's the point. It's not the actual size that matters but the effectiveness of it—its power and success in serving the interests of the consumer. And in its attention to size, the whole thrust of antitrust policy under Sherman (2) has been contrary to those very interests.

NO TO "MARKET POWER"

Nor has the record with the Clayton Act been any better. Clayton (2), especially as amended by the Robinson-Patman Act of 1936, was meant to protect the small trader from the large chains of retailers, to protect the Mom and Pop stores from the menace of A & P—Safeway I don't think existed at that time. Of course it so happens that actually the people who are going down now are A & P and Safeway and so on, and the people who are coming up are now the new Mom and Pop stores. That illustrates, fortunately, the still flickering light of free enterprise and competition that the rulers of this country have not yet managed to extinguish.

And how did the Robinson-Patman Act and, less explicitly, Clayton (2) propose to provide this protection of small retailers? In fact, by preventing efficiency in the service of the consumer. It's nonsense! You've only got to look at the cases decided under the Robinson-Patman Act, and you will find situations where it is an offense to reduce your price, where it is an offense to raise your price, and where it is an offense to keep your price unchanged. And indeed there is a lot of other nonsense that arises in all the Robinson-Patman cases.

Then look at Clayton (3), which raises a terrible specter. There mustn't be tying contracts; there mustn't be exclusive requirement contracts. These are bad. Why are they bad?

The tying contract is bad because the man who "ties" widgets to gadgets and makes you buy the package together is gouging you—he's making a profit on two commodities when you only want to buy one. Could anything be more clear? But of course, if you only want widgets, you won't pay extra to get widgets + gadgets. So in fact it is impossible in a tying contract for the tier to make "two profits" just by tying two commodities. It is an impossibility, but not in the eyes of the American courts, and still less in the eyes of the Justice Department or the FTC.

The same thing applies to exclusive requirements contracts. If you, as a retailer, want to carry a certain supplier's widgets and the supplier requires that you also carry his, and only his, gadgets, it may look like he's foisting something on you. But again, it is an impossibility for the seller to make the same profits twice by such a device.

In a more sophisticated way it is often alleged that the devices themselves may not be odious and harmful in that they enable the seller to reap a higher profit, but the power to make a tying contract or an exclusive requirements contract is evidence of undesirable market power. That too is a mistake. And even if there were truth in it, then the thrust of policy, of the law, should be to deal with the undesirable market power and not with a mere indicia of the undue market power—if it were true, which it largely isn't.

ENEMY OF CONSUMERS

And then one comes, in Clayton (7), to merger policy and to the craziness of the decisions in the Brown Shoe, in the Philadelphia National Bank, in the Proctor & Gamble cases. They not only make no sense at all; they make nonsense on stilts, as Jeremy Bentham once said and would say again if he were alive now. Take the famous Vons Grocery case in Los Angeles. Vons Grocery wants to merge with Shopping Bag, and Vons Grocery has got 4 percent of the Los Angeles retail market and Shopping Bag has got 3 percent. That adds up to 7 percent—Oh my God! That's going to cause fantastic harm to competition in retail trading in Los Angeles; we've got to stop it. And stop it they did.

Not only has the trend of public merger policy been the wrong way for years, but as anyone could have forecast, it is apparently about to culminate—if the views of the Justice Department and the FTC are accepted by Congress and the courts—in the most preposterous thing of all: that in the future not one of the 200 top American companies will be allowed to merge with any other firm. Now notice how protective, not of competition, but of the opposite of competition this is.

For consider, if this principle were adopted, what it would mean in a typical case, shall we say the airlines, which are of course still partly under the CAB and not under the Justice Department or the FTC with respect to mergers. It would mean that if, say, United Airlines happens to be the top company at this moment then it must be the top company till kingdom come, and if American Airlines is number two at this date then it must be number two till kingdom come—unless it be that without any process of merger United fell and American rose or Eastern fell and National rose, etc., etc. But one of the ways in which a dominant position is undercut, and properly and desirably undercut, is in fact by the process of merger—not always by merger, not by a long chalk; but freedom to merge when in fact the merger happens to be the most economic way of breaking up a situation that is congealed. And the enemy of the consumer is a congealed situation and the friend of the consumer is every kind of force that breaks up congealed situations.

Yet the judges, the lawyers, the politicians, and the bureaucrats in this field have been dominated by the idea that they must congeal situations; for if that's not done, some people will become very big, and that's bad, and they will then have to be broken up. And so the whole thrust of antitrust policy has been to harden the arteries of American business, as if there aren't enough other matters that are hardening the arteries of American business—all the regulatory weight, all the requirements of EPA and OSHA, etc., etc., etc. And the antitrust system adds most balefully to it.

UNNECESSARY TAMPERING

But I left out Sherman (1). Sherman (1) deals with cartels, with price fixing, with market sharing. Is this not fundamentally bad, fundamentally contrary to a free-market, competitive situation? Is it not right that, out of the debris of the antitrust system, at least Sherman (1) should be retained? Polished perhaps, but nevertheless recovered and maintained?

Well, that's a debatable matter. It may well be true—it probably is—that there are many cases of agreements to fix prices and to share markets that are bad and should not happen, that you don't want to happen because they are harmful to free enterprise. But that doesn't end the question. Two questions then follow. First, is law the proper agency to deal with them? And second, are you in fact dealing with matters of minor, very minor, importance and thus directing your gaze away from matters of supreme importance in the very same field?

My answers are that law is not the proper agency and that in fact Sherman (1) deals with molehills and not with mountains. Still, I am much less enthusiastic about what I say in dealing with Sherman (1) than I am in all the rest, and I wouldn't mind terribly if it were retained because some of it that's there by accident does a little good and may not do a great deal of harm. But essentially it's not necessary.

If in fact you see to it that the essential features of the free-market economy are not undermined by governmental power in other ways, you need worry very little about private agreements to fix prices and share markets. They will happen and they can be bad occasionally, but they always break down; they never last, can't last by their very nature. And that's why you needn't worry much about using the blunt instruments of law to deal with them if you don't let price fixing and market sharing be engineered by the government with seven-league boots, as in fact it does. Every form of really powerful, anticompetitive behavior in the American economy of the character addressed by Sherman (1) is carried out by the government.

BIGGEST MONOPOLIST

It is the government that has, for example, the massive and fantastic farm support program. Is there a greater instance of fixing prices and restricting supplies and all the other things for which monopolies are damned, than the farm support program? The man now in the White House probably could never have dreamed of becoming president of the United States if it hadn't been that the price of peanuts in this country, by reason of the farm support program, is 2½ times the world price of peanuts. How could he ever have become as moderately wealthy or perhaps more than moderately wealthy as he is? Of course, when the housewife goes into a store and picks up a jar of peanuts, she doesn't worry that in fact she's paying 2½ times the world price. But when it comes to meat and wheat and corn and so on, you ought to worry about it and should have been worrying for years. That's the government.

And then there is the massive monopolistic power, the worst of all, of private license power in the form of labor unions. The government by way of the Wagner Act, only partially and inadequately modified by the Taft-Hartley Act, gave the unions fantastic private license monopolistic power. Nothing in the whole of the US economy compares with that.

So if you play around and fiddle around with Sherman (1), you may perhaps occasionally hit an outer or an inner, but you won't hit the real bull's eye. The real bull's eye can only be hit by taking the government out of this, not putting it in.

And how many people who get so excited about the role of monopoly, alleged monopoly, in the American economy, ever think of the effect of the tariff, obviously a great engine for the production of price fixing, of monopolistic power of a kind, of a nefarious kind? As was said many many years ago of Europe, the tariff was the mother of the trusts, which of course was correct. It's true that the American tariff is now far lower than in recent times, and that's a very excellent, beneficent development, but it still is there and still is important.

ANTICOMPETITION

But, having outlined the contrary effects of antitrust law, there remains the fundamental question. Is this merely the result of an ill-drafted system of law, an ill-understood system of law, the attempt to deal with economic questions by way of judicial dicta and incompetent judicial analysis? Or is it the case that no conceivable antitrust law could in fact be of the character that prima facie, theoretically—as I once believed and most free-market economists once believed—was its true character? I think the answer is the second. It's not just the misconceptions, the mounting misconceptions, displayed in the judgments in the various cases that have taken place in this country.

To see why, even theoretically, antitrust law cannot help the free market along, consider an example. Suppose I do have 90 percent or even 100 percent of the widget market at this moment. That could be because I am a dastardly monopolist and I have used various nefarious devices to get it. That could be because I have been the most successful, most efficient producer. But it could be also—and this is perhaps the most important insight that should be understood—a temporary phenomenon. It could be that in widgets I have seen something that nobody else has yet seen. But it's a risky matter, and I will only pursue my insights if I can expect supernormal profits for a time.

This will of course be utterly repugnant to the lawyers and the bureaucrats and the FTC and the Justice Department, that only my being able to capture for a time supernormal profits will in fact induce me to go ahead with this. And yet once I have captured these profits, the very nature of the process, if left alone, will in due course bring other people into widget making, which will then reduce my level of profits to a normally competitive one. How do you think politicians or lawyers would ever be able really to catch the differences between these particular cases? In my view, it cannot be done.

Regrettably, my own country—in admiration, of course, of the great successes of American antitrust—fortunately at a somewhat laggardly pace has been following behind, and even the Germans have caught this malady a little. But in my view the antitrust system, in its economic effects, is one of the great evils of American law—possibly greater than all of the regulatory demons, whom, I hope, you will be shooting down in the next few years.

Arthur Shenfield is an economist and barrister at law. He has held numerous visiting professorships in law and economics and has lectured in Europe, North America, Latin America, and Australia. He served as president of the Mont Pelerin Society, 1972-74.