Freeman

ARTICLE

Breaking Up Antitrust

Free-Market Competition is the Best Remedy for Monopolies

JANUARY 01, 1997 by EDWARD LÓPEZ

In one of the most famous passages in The Wealth of Nations, Adam Smith cautions, People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. . . .

Supporters of antitrust laws believe that Smith couldn’t speak the truth more plainly. They deem this sort of anticompetitive behavior bad for consumers. Antitrust regulation, they argue, is necessary to protect competition and the well-being of society from these kinds of conspiracies.

But is Adam Smith right? He correctly warns of the natural incentive that businesses have to get the highest price possible for their products, and perhaps to monopolize their industry or collude with one another to increase prices. One might legitimately conclude that free markets cannot always be left free, and that government institutions like antitrust are necessary for the protection of society’s interests.

As awful and ridiculous as this may sound, people who love freedom must take this claim seriously. Antitrust supporters generally have a strong foundation, not only in Adam Smith, but in much of the conventional economic theory of the twentieth century. Economists have at their disposal powerfully convincing ways of showing that monopoly is harmful, and that antitrust enforcement is the perfect remedy, at least in theory.

The real world also provides plenty of examples that support the claims of antitrust supporters. The kind of behavior that Smith describes does indeed occur. One such case was the notorious fare-fixing telephone conversation initiated by American Airlines chairman Robert Crandall with Braniff president Howard Putnam in 1983.1

The early 1960s gave us another infamous example. General Electric, Westinghouse, Allis-Chalmers, and I-T-E coordinated a pervasive price conspiracy in selling heavy electrical equipment to the government. A single company would enter a bid lower than all its competitors, all of whom would enter identical bids higher than the lowest. In one instance, seven different companies entered a bid of exactly $198,438.24, and the contract was awarded to the single firm that bid lower. It was a very effective cartel.

These were supposed to be secret bids, and the conspiracy would never have worked if not for the cartel’s ingenious enforcement strategy. The firm to enter the lowest bid was determined by the fullness of the moon. This phase of the moon strategy was foolproof for decades, and was only discovered in 1959 by a reporter in Tennessee, who noticed the peculiarity of the identical bids. The conspiracy is estimated to have cost consumers $175 million in every year of its decades-long existence.2

These examples illustrate the creativity that businesses sometimes use in trying to monopolize a market. When cartel members can actually enforce the agreement, or when a firm actually succeeds in monopolizing a market, the result is almost invariably bad for consumers.3 Whether antitrust enforcement does the job or not, we still need to take the threat of monopoly seriously. And we still need to recognize and acknowledge that antitrust is, at least in theory, a way to deal with this threat.

But do classical liberals need to concede that antitrust regulation actually does the job? Do we need to agree that antitrust deals effectively with the threat of monopoly and that it is therefore good for society? The answer is clearly no. In fact, sober economic analysis can explain how antitrust policy fails to combat the monopoly threat, how it betrays the public interest it is pledged to protect, and how it therefore serves the private interests of the businessmen, politicians, and bureaucrats involved. In short, we need to voice the reasons why the antitrust laws should be repealed.4

Antitrust Enforcement: The Ideal Versus the Real

One would rightly be suspicious to discover that antitrust laws in this country are enforced by two separate federal agencies, the Antitrust Division of the Department of Justice and the Federal Trade Commission.5 Each agency is subject to Congress by way of budget appropriation, confirmation of appointees, and general oversight into agency activities. Because of this oversight, we can be fairly certain that the agencies enforce the statutes according to the wishes of the current Congress.6

In a perfect world in which Congressmen are public servants, antitrust should work the way it is supposed to. We should expect that once Congress allocates an amount to each agency, staff members there take an inventory of the monopoly inefficiency in the economy, make a list according to the costs to society, and bring cases against these monopolies in order of their importance until their budgets are exhausted. There might be some red tape and pre-investigation procedures to worry about, but overall this seems to be the way it should work. What better way to make society better off? How much better can a policy get?

Unfortunately, the naive assumption that there is a public-interest standard in government dominates discussions of antitrust and in so doing abstracts entirely from the existence and power of special interest groups. Policies that were introduced in the name of promoting competition have become tools to protect against competition. Congress, businesses, and the antitrust bureaucracy all have much at stake in the antitrust game. They form a triangle of private interests that drive antitrust enforcement at the expense of the general public.

The Antitrust Bureaucracy

First, consider the incentives of those who are in charge of enforcing the antitrust statutes. At the Antitrust Division, there are 331 attorneys and 50 economists, while the FTC maintains a comparable 435 attorneys and 63 economists. These agencies are hierarchical and experience much of the red tape that any government bureau does. But at some point, every decision is made by an individual, who has his own career agenda and objectives.

One study of the Antitrust Division7 found that the strengthening of the anti-merger laws (the 1950 Cellar-Kefauver amendment), and especially the early cases brought to court, made antitrust expertise more valuable in the private marketplace. There was a clear increase in the demand for these skills so that a young lawyer had a great deal to gain by working in the Antitrust Division. What’s more, he or she had even more to gain from the specific experience of arguing cases at trial in the federal courts. Lawyers at the Antitrust Division have every incentive to choose cases that will go to trial, and go to trial quickly, regardless of the efficacy of the action in combating monopoly, or its effect on consumer welfare.

A similar study focuses on the FTC.8 The study found that the ultimate career objective of most FTC lawyers was a job at a prestigious private law firm. Robert Katzmann writes that some cases threaten the morale of the staff because they often involve years of tedious investigation before they reach the trial stage.9 Therefore, the FTC opens a number of easily prosecuted matters, which may have little value to the consumer . . . in an effort to satisfy the staff’s perceived needs.10 One FTC attorney is quoted in the study as saying, for me, each complaint is an opportunity, a vehicle which someday could take me into the courtroom. I want to go to trial so badly that there are times when I overstate the possibilities which the particular matter might offer.11

It’s clear from studies like these that the antitrust bureaucracy doesn’t select cases to prosecute on the basis of their potential net benefit to society. Instead, the staff at FTC and the Antitrust Division use the discretion that they do have to further their own private interests and careers rather than those of the public at large. The antitrust bureaucracy cannot be counted on to uphold the public interest in enforcing antitrust laws.

The Congress

Although the antitrust bureaucrats would like to exercise complete control over their enforcement agendas, they are ultimately accountable to their congressional oversight and appropriations committees. Now, consider the incentives of members of Congress. The goal for most members is to get re-elected or ascend to a higher office. There is a much greater chance that this will happen if they support local or narrow interests rather than some vague notion of the national or public interest.

Antitrust is one of many pork-barrel programs that Congress uses to transfer wealth from large, unorganized groups of individuals to the narrow, organized interests of others. In many ways, antitrust is the perfect wealth-transfer vehicle. It is highly inconspicuous, covering the entire economy rather than just specific industries. It applies to specific business practices, and can therefore be used to protect less efficient companies from their more efficient competitors. Antitrust can therefore deliver potent benefits (directly limiting the competitiveness of one’s rivals), while the costs occupy a tiny line on the federal budget and are hardly noticeable at all. The stockholders of the protected company gain at the expense of the stockholders of the more efficient, yet legally hampered, competitor.

The evidence on the matter is clear. Antitrust enforcement falls less stringently on companies headquartered in the congressional districts of members on the key committees with oversight and budget authority over the antitrust bureaus.12 And if a committee’s membership changes significantly, the antitrust bureaucracy changes as well. After the 1976 and 1978 elections, the key oversight committees experienced rapid turnover of its members. Prior to that, the FTC had a very avid enforcement agenda. But the new committee members found their constituent interests demanded a different approach. Therefore, in 1979, the Congress blasted the FTC as a runaway and out-of-control bureaucracy. After a series of heated hearings, the FTC systematically watered down or simply halted most of its controversial activities. As the currents change in pork-barrel waters, so too does the antitrust bureaucracy.

Other aspects of antitrust also reveal private interests at work. While the original Sherman Act was ostensibly supposed to rein in the dangerous concentrations of wealth among the giant monopolies of the day, history reveals little monopoly power existed at the time. Prices were falling throughout the economy and output was surging.13 This only serves to benefit consumers, and Congress even recognized this as true.14 So why did Congress enact an antimonopoly law in such an apparently competitive climate? Because the law protected small or inefficient businesses from the rigors of competition, and it portrayed Congress as a champion of justice and freedom. Other studies find similar results for the Clayton Act.15 Still other studies show that antitrust not only fails to benefit consumers, but also harms them.

The conclusion from examining the incentives created by antitrust laws, and actions taken under them, is that antitrust laws do not serve the public interest as their supporters would claim. Antitrust does not combat the monopoly threat, but rather protects less efficient companies from their competitive rivals, bolsters the political capital of members of Congress, and furthers the careers of Washington bureaucrats. In short, the only thing that antitrust makes more efficient is the cozy triangle of special interests.

Conclusion

Classical liberals should take the threat of monopoly seriously. But the answer to this threat is not antitrust laws. Any potential monopoly must instead be exposed to the discipline of market competition. Economists have long made convincing arguments that a natural monopoly is rare. Most monopolies exist because of government intervention. By repealing antitrust statutes, and ending government-sponsored monopoly, we will allow the threat of monopoly to be dealt with in the most effective manner possible: the market process.

Adam Smith rightly warned us of the dangers of business conspiracies. But in the same famous passage quoted earlier, he went on to warn of the even greater danger of relying on government institutions to combat it:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

1. Howard Putnam taped this conversation. It was entered as evidence in the case brought by the government against American Airlines and Crandall. Quoted from Roger E. Meiners, Al H. Ringleb, and Frances L. Edwards, The Legal Environment of Business, 3rd ed., p. 401.

2. Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization, pp. 181-183, and Richard A. Posner, The Social Cost of Monopoly and Regulation, Journal of Political Economy, 83:807-827.

3. Probably most successful monopolization is achieved through government protection.

4. A compelling case has been made along these lines by D. T. Armentano. See Antitrust and Monopoly (New York: John Wiley and Sons, 1982) and Antitrust Policy: The Case for Repeal (Washington, D.C.: Cato Institute, 1986).

5. This arrangement has been the subject of widespread and extensive criticism, which typically calls for the elimination of the FTC. See Richard S. Higgins, William F. Shughart II, and Robert D. Tollison, Dual Enforcement of the Antitrust Laws, in Robert J. Mackay, James C. Miller III, and Bruce Yandle, eds., Public Choice and Regulation: A View from Inside the Federal Trade Commission (Stanford, Calif.: Hoover Institution Press, 1987).

6. Barry R. Weingast and Mark J. Moran, Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission, Journal of Political Economy, October 1983, 91:765-800.

7. Suzanne Weaver, The Decision to Prosecute: Organization and Public Policy in the Antitrust Division (Cambridge: MIT Press, 1977).

8. Robert A. Katzmann, Regulatory Bureaucracy: The Federal Trade Commission and Antitrust Policy (Cambridge: MIT Press, 1980).

9. Ibid., p. 83.

10. Ibid.

11. Ibid., p. 61.

12. Richard A. Posner, The Federal Trade Commission, University of Chicago Law Review, 37:47-89, 1969. Roger L. Faith, Donald R. Leavens, and Robert D. Tollison, Antitrust Porkbarrel, Journal of Law and Economics, 15:329-342, 1982.

13. Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, International Review of Law and Economics, 5:73-90, 1985.

14. Ibid., pp. 80-81.

15. Robert B. Ekelund, Michael J. McDonald, and Robert D. Tollison, Business Restraints and the Clayton Act of 1914: Public- or Private-Interest Legislation? in Fred S. McChesney and William F. Shughart, The Causes and Consequences of Antitrust: The Public Choice Perspective (Chicago: University of Chicago Press, 1994).

Mr. Lopez is Charles G. Koch Research Fellow at the Center for Market Processes and H. B. Earhart Doctoral Fellow in economics at George Mason University.

ASSOCIATED ISSUE

January 1997

comments powered by Disqus

EMAIL UPDATES

* indicates required
Sign me up for...

CURRENT ISSUE

September 2014

For centuries, hierarchical models dominated human organizations. Kings, warlords, and emperors could rally groups--but also oppress them. Non-hierarchical forms of organization, though, are increasingly defining our lives. It's no secret how this shift has benefited out social lives, including dating, and it's becoming more commonplace even in the corporate world. But it has also now come even to organizations bent on domination rather than human flourishing, as the Islamic State shows. If even destructive groups rely on this form of entrepreneurial organization, then hierarchy's time could truly be coming to an end.
Download Free PDF

PAST ISSUES

SUBSCRIBE

RENEW YOUR SUBSCRIPTION