The Antitrust Fraud

Antitrust and Monopoly, by Dominick T. Armentano, New York, N.Y.: John Wiley & Sons, 1982, 292 pp. $22.95/$12.95.

Antitrust is a lot like Alice in Wonderland, and US District Court Judge David Edelstein, the presiding judge in the government's massive antitrust case against IBM, reacted to the Reagan administration's outright dismissal of the 12-year-old action in January 1982 with all of the grace and dignity of the Red Queen.

Initially, according to the New York Times, he "angrily chastised" the antitrust division attorneys who appeared before him in his New York courtroom because their boss, antitrust division chief William Baxter, did not come up from Washington and personally appear before him to announce the government's decision. Baxter, of course, was in Washington that day announcing the antitrust settlement with AT&T that provided for the dismemberment of the country's largest government-granted monopoly. Subsequently, Judge Edelstein launched a personal vendetta against Baxter, calling for a congressional investigation and charging Baxter with conflict of interest because, while a Stanford law professor, he briefly served as a consultant to IBM as an expert economic witness in a private case.

It was a standard of ethical conduct Judge Edelstein did not apply to himself. At one point during the case, he appointed a special master to represent the court, during government discovery proceedings against IBM, who had been a paid consultant for Memorex in its private antitrust case against IBM. Later, though there was no longer a case pending before him, Judge Edelstein granted—without notice to IBM or the government—a motion filed by a private lawyer with no standing (that is, no personal interest in the case other than amicus curiae, a friend of the court) seeking to reinstate the government's case.

It was, all in all, a fittingly grotesque conclusion for a case some have correctly termed the antitrust division's Vietnam and what almost all agree was the last massive monopoly case the division will prosecute for a long time. The IBM case was an intellectual, economic, and legal fraud from its inception, conceived in the dying days of the Johnson administration. IBM's only sin was in being too successful, too innovative, and too competitive. Nothing more. IBM won every single private antitrust case spawned by the government suit that went to trial, and it would have won the government case too.

Given the extensive publicity accompanying the IBM and AT&T cases and the subsequent attention given to the Reagan administration's antitrust policies, Dominick Armentano, a professor of economics at the University of Hartford, has demonstrated a superb sense of timing with the recent publication of a revised and updated version of his classic 1972 book on the myths of antitrust. Newly titled, Antitrust and Monopoly: Anatomy of a Policy Failure, the book is an immensely entertaining and satisfying attack on antitrust orthodoxy.

At opposite ends of the antitrust spectrum are the abolitionists and the enthusiasts. The abolitionists, like Armentano, are radical free-market types who regard the antitrust laws as a purely political phenomenon with no economic justification that ought to be repealed as a matter of principle.

Enthusiasts, like the late Sen. Philip Hart of Michigan and Sen. Howard Metzenbaum of Ohio, and their economic camp followers, also view antitrust from a political and social, rather than economic, perspective. They want to use the antitrust laws to reshape the economy into something more to their liking. Senator Metzenbaum, for example, made his fortune from government-granted monopolies at municipal airport parking lots and would not understand or recognize a free market if it bit him on the leg.

In between the two extremes are the minimalists and the traditionalists. The minimalists, like Robert Bork and William Baxter, agree with the abolitionists that the antitrust laws make no economic sense. But, unlike the abolitionists, they cannot bring themselves to call for the laws' repeal. Instead, they argue, as Bork did unconvincingly in his 1978 book, The Antitrust Paradox, that antitrust laws were originally intended to help consumers and that courts ought to construe them in this utilitarian manner. This may be good news for consumers, at least in the short term. But, even though Bork admits that almost all price-fixing conspiracies are short-lived and fragile things and that prohibiting mergers merely protects inefficient businesses, he nevertheless advocates selective enforcement of these two parts of the antitrust laws to the virtual exclusion of all the rest, which he concedes are invariably anticonsumer in their effects.

The traditionalists cannot be bothered with such mundane distractions like economics. The law is the law, and what was good enough for Teddy Roosevelt and Chief Justice Taft is good enough for them. Judge Edelstein is a traditionalist (albeit one with a strange, unjudicial, and well-documented bias against IBM), as are most other federal judges with any significant exposure to antitrust. So are most of the members of the antitrust bar, plaintiffs, and defendants. To many of them, economics is something expert witnesses are supposed to know.

It is the traditionalist who will likely learn the most from Antitrust and Monopoly. For even if traditionalists, particularly those in the antitrust bar, deplore the excesses of antitrust in the 1970s such as IBM and the Federal Trade Commission (FTC) cereal companies case on "shared monopoly," most of them still believe in a golden age of antitrust enforcement that once rescued the country from the evil grip of monopolistic trusts. For them, Armentano is downright unfair. He tells us what really happened in all of those golden-age cases—E.C. Knight, Northern Securities, the Standard Oil Trust, the American Tobacco Trust, U.S. Steel, and even the classic price fixing case, Addyston Pipe.

Bork, in his book, particularly likes the court of appeals decision in Addyston Pipe by then-Circuit Judge William Howard Taft because it set down a "rule of reason" approach for dealing with price-fixing conspiracies under the Sherman Act, an approach long since discarded for today's per se rule. In his treatment of Addyston Pipe, Armentano, by way of contrast, emphasizes the facts—the low prices produced by the admitted conspiracy among certain regional manufacturers. He quotes testimony from the "victims" of the conspiracy to the effect that the prices were "the lowest that could be obtained from any of the pipe works in the United States."

Armentano's best, and longest, treatment of a single case is the Standard Oil Trust. In 18 pages, he presents the most clear, concise, and well-written history of the petroleum industry during the 19th century available anywhere. And those who might mistrust an abolitionist's version of history need only wade through early muckraker Ida Tarbell's The History of the Standard Oil Company (1904) to see that Armentano has got it exactly right.

Fortunately for the country, by the time the government got around to prosecuting Standard Oil in 1909, Standard Oil had already, by its efficient and innovative business practices and technological improvements, substantially reduced the price of refined kerosene (from 26 cents per gallon in 1870 to 8 cents per gallon in 1885). Moreover, the trust by that time was already being broken up by competition—its share of the petroleum products market had fallen from 88 percent in 1890 (the year the Sherman Act was passed) to 64 percent in 1911 (the year of the Supreme Court decision affirming the judicial dissolution of the trust). Standard's own oil production decreased from 35 percent of the market in 1898 to 11 percent in 1906.

Armentano's book is weakest in analyzing more recent developments in antitrust, particularly those since 1972. Many of his chapters simply add a short discussion at the end covering post-1972 cases, with little effort to place them in historical context or to assess the current state of the law. These deficiencies in updating, however, are minor compared to the book's overall impact. Antitrust is a politically inspired consumer fraud now and has been from its inception. Armentano's book shows us this better than anything else around.

Michael McMenamin is an attorney and a frequent contributor to REASON and Inquiry.