Freeman

ARTICLE

Competition, Monopoly, and the Role of Government

DECEMBER 01, 1959 by SYLVESTER PETRO

Professor Petro of New York University School of Law reveals here some results of his special attention to labor and antitrust legislation and policy.

The great monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.

LUDWIG VON MISES, Human Action

In the free society government keeps the peace, protects private property, and enforces contracts. Government must do these things effectively, and it must do nothing else; otherwise, the conditions ab­solutely necessary to genuine per­sonal freedom in society are ab­sent. Whether or not a genuinely free society is attainable no mortal man can know; the limits of our knowledge are too narrow. But one thing we do know: that until at least the advocates of the free so­ciety are fully aware of the condi­tions necessary to its existence, it can never come about. For they must ever be on guard against new movements, ideas, and principles which would endanger its realiza­tion. And on the other hand, they must be sharply aware of existing impediments so that they may di­rect their energies intelligently to the removal of the causes of cur­rent imperfections.

I take up with considerable trep­idation the task of arguing that government should quit trying to promote competition by means of the antitrust laws, especially since some proponents of the free so­ciety believe that vigorous en­forcement of those laws is abso­lutely indispensable. Yet, antitrust laws are inconsistent with the basic principles of the free society, private property, and freedom of contract; they deprive persons of private property in some cases and outlaw certain contracts which would otherwise be valid. More­over, they expand the role of government far beyond that en­visaged by the theory of the free society and thus amount to an un­conscious admission that the fun­damental theory itself is incoher­ent; for antitrust policy implicitly accepts the Marxian premise that an unregulated economy will result in the decay of competition and in the emergence of abusive monop­oly. Finally, and this may be the most pressing reason for the pres­ent article, in their attempt to promote competition the antitrust laws may in fact be inhibiting it.

Vague and Uncertain Laws

One of the basic evils in the antitrust laws is the vagueness and uncertainty of their application. They have produced mainly con­fusion. Sixty years ago the anti­trust laws prevented the Great Northern Railway and the North­ern Pacific from merging, al­though but a minor fragment of their respective lines overlapped in competition. But a few years later United States Steel was per­mitted to consolidate a vast pre­ponderance of the steel production of the country under one manage­ment. Now we are off on another antimerger binge, and so Bethle­hem and Youngstown are enjoined from doing on a smaller scale what U.S. Steel did on a grand scale. Socony and other integrated oil companies were told that they might not buy up distress oil at prices set in competitive markets. But only a few years earlier the Appalachian Coals Association was permitted to act as exclusive mar­keting agent for most of the coal production of an entire region. Forty years after its foresight, courage, and capital had been in­strumental in developing the great General Motors productive com­plex, the du Pont Company was ordered to give up control of its G.M. stock because of a relatively picayune buyer-seller relationship between them. Only space limita­tions preclude an almost endless listing of equally contradictory and inequitable results of the un­predictable eruptions from the an­titrust volcano. At present, the allegedly competitive policies of the Sherman Act are mocked by those patently anticompetitive components of the antitrust laws, the Robinson-Patman Act and the fair-trade laws.

Thus, to the careful and honest observer the antitrust laws appear to be a charter of confusion, rather than the "charter of economic lib­erty" which oratory calls them.

They have been transmogrified by the political vagaries to which their vagueness makes them sus­ceptible into an insult to the idea that laws should apply equally to all. Some may regard these con­sequences as merely unfortunate incidents of a generally praise­worthy program. Yet we need con­tinually to remind ourselves that law is for the benefit of the citi­zenry, rather than for the sport of government and of the legal profession. The main function of law is to provide people with clear and sound rules of the game, so that they may pursue their affairs with a minimum of doubt and un­certainty.

While aggravating the existing uncertainties of life, the antitrust laws can make no demonstrable claim to improving competition, despite the contentions of enthu­siastic trustbusters. I have heard it said that the result of breaking up large firms is to create com­petition among its fragments, and thus to contribute to social well­being. But a moment’s reflection will expose this as a bare and un­supportable assertion. Even though additional firms may be created by breaking up large businesses, the result is not necessarily in the social interest, nor does it neces­sarily create or improve competi­tion. The social interest and com­petition are not automatically served by an increase in the num­ber of firms. It is a commonplace that competition may be more vig­orous and the service to society greater when an industry has few firms than when it has many. The question from the point of view of society is not how many firms there are, but how efficiently and progressively the firms—no matter how few or how numerous—utilize scarce resources in the service of the public. Maybe pro­duction will improve after a single large producer is split into frag­ments; but it is equally possible that it will not. No one can tell in advance, and it is also impos­sible to do so after the fact. The only thing that can be said with certainty about the breaking up of businesses is that government’s power has been used to deny prop­erty rights rather than to protect them. If we really believe that private property is the most valu­able institution of the free society, and that in it lies the strength of the free society, then it is wrong to abrogate that institution on the basis of pure guesswork.

Monopoly Unionism

The antitrust approach to im­proving competition loses even more of its glamor when one un­derstands that the most abusive and socially dangerous monopoly which exists today in this country is the direct product of special governmental privileges. Labor unions are today the most destruc­tive monopolies in our system, and they are also the greatest benefi­ciaries of governmental special privileges.

First and foremost, there is the virtual privilege of violence, which trade unions alone enjoy. Neither individuals nor other organizations are so privileged. Memory is strangely short as regards union violence, and yet every big union in America has used it habitually, in both organizing and "collective bargaining."

Of the men who resist union membership, many are beaten and some are killed. They have much more to fear than do persons who reject the blandishments of sellers of other goods or services. And this is true despite the fact that the right not to join a union is as firmly entrenched in legal theory and the theory of the free society as is the right to buy as one wishes or to refuse to buy when one so wishes.

Last spring, the United Mine Workers engaged in one of its peri­odic purges of the nonunion mines which spring up continually owing to the uneconomic wage forced upon the organized mines by the UMW. I have before me an Associ­ated Press dispatch, dated April 10, 1959, which reports that "one nonunion operator has been killed, five union members charged in the fatal shooting, and three ramps damaged by dynamite since the strike began March 9. It has made idle more than 7,000 men over the union’s demands for a $34.25 a day wage, a $2.00 in­crease." The grimmest aspect of the dispatch lay in the news that Governor A. B. Chandler of Ken­tucky was threatening—after a full month of terror and pillage by the union—to order National Guardsmen into the coal fields.

The Pattern of Violence

This is no isolated case. On the contrary, violence and physical ob­struction are standard features of most strikes, except where the struck employers "voluntarily" shut down their businesses, in ac­cordance with the Reuther theory of enlightened management which I have described in a recent book, Power Unlimited: The Corruption of Union Leadership (Ronald Press, 1959). A special dispatch to The New York Times, dated Au­gust 5, 1959, reports that " a siege was lifted today for 267 super­visory employees at the United States Steel Company’s Fairless Works here… From now on the supervisory personnel will be al­lowed to enter and leave the plant at will for maintenance." The dis­patch is silent concerning the probable consequence of any attempt by the steel companies to maintain production. But the fact that su­pervisors were besieged because of maintenance operations suggests that rank-and-file workers who at­tempted to engage in production would be mauled. It is not out of order to infer that the siege of the supervisors, otherwise a pretty silly act, was intended to get across that message.

The careful student of industrial warfare will discern a pattern of violence which reveals an institu­tionalized, professional touch. Mass picketing, goon squads (or "flying squadrons" as they are known in the Auto Workers union), home demonstrations, paint bombs, and perhaps most egregious of all, the "passes" which striking unions issue to management personnel for limited purposes—these are the carefully tooled components of the ultimate monopoly power of unions.

As a matter of fact, we have be­come so befuddled by, and so weary of, the terror, destruction, and waste of the unions’ organizing wars that we view with relief and contentment one of the most pro­digious contracts in restraint of trade ever executed—the cele­brated "no-raiding pact" of the AFL-CIO. No division of markets by any industrial firm has ever achieved such proportions. The "no-raiding pact" divides the whole organizable working force in accordance with the ideas of the union leaders who swing the most weight in the AFL-CIO. It deter­mines which unions are "entitled" to which employees. The theory of modern labor relations law is that employees have a right to unions of their own choosing. Reversing that principle, the "no-raiding pact" asserts that the choice be­longs to the union leadership. If any business group were so openly to dictate the choices of consum­ers, it would be prosecuted by sun­dry federal agencies and hailed be­fore the eternal Kefauver Commit­tee. It would not receive congratu­latory telegrams from the chief politicians of the nation.

Government Intervention

The more one examines Ameri­can labor law the more one be­comes convinced of the validity of Professor Mises’ theory that no abusive monopoly is possible in a market economy without the help of government in one form or an­other. If employers were permitted to band together peacefully in or­der to resist unionization, as unions are permitted to engage in coercive concerted activities in or­der to compel unionization, it is probable that the purely economic (nonviolent) pressures of unions would not be as effective as they have been in increasing the size and power of the big unions. But the government has taken from employers all power to resist un­ionization, by peaceful as well as by violent means. At the same time it has permitted unions to re­tain the most effective methods of economic coercion. And so picket­ing, boycotts, and other more sub­tle modes of compulsory unionism are in many instances as effective in compelling unwilling member­ship—in the absence of counter­vailing economic pressures from employers—as sheer physical vio­lence.

Monopoly unionism owes much, too, to direct and positive help from government. Consider the vigorous prohibition of company-assisted independent unions which has prevailed for over twenty years. Although such small unions might at times best serve the in­terests of employees, the early Na­tional Labor Relations Board prac­tically outlawed all independent unions, and recent decisions con­tinue to favor the big affiliated unions.

The Majority-Rule Principle

But perhaps the most significant contribution of government to mo­nopoly unionism is the majority-rule principle which makes any union selected by a majority of votes in an "appropriate bargain­ing unit" the exclusive representa­tive of all employees in that unit, including those who have not voted at all, as well as those who have expressly rejected the union as bargaining representative. Major­ity rule is a monopolistic principle; it is always to be contrasted with individual freedom of action. But it is particularly prone to monopo­listic abuse in labor relations. De­termination of the "appropriate bargaining unit" is left to the vir­tually unreviewable discretion of the National Labor Relations Board. And that agency has in nu­merous instances felt duty-bound to carve out the bargaining unit most favorable to the election of unions. Indeed, politicians might learn something about gerryman­dering from studying the unit de­terminations of the Labor Board.

Even if the gerrymandering could be eliminated, the majority-rule principle would remain a source of monopolistic abuse, based on monopoly power granted and enforced by government. A union may be certified exclusive repre­sentative in a 1,000-man bargain­ing unit on the basis of as few as 301 affirmative votes, for an elec­tion will be considered valid in such a unit when 600 employees participate. If a bare majority then votes in favor of the union, the remaining 699 are saddled with the union as their exclusive bargaining representative, whether or not they want it.

Competitive Safeguards

Society has nothing to fear from unions which without privi­leged compulsion negotiate labor contracts and perform other law­ful and useful jobs for workers who have voluntarily engaged their services. For they are then but another of the consensual serv­ice associations or agencies which a free society breeds so prolifically. Moreover, the free society has demonstrated that its fundamental mechanism, free competition in open markets, is tough and resil­ient enough to defend against ex­ploitation by any genuinely volun­tary association. The critical prob­lem arises when a man or an asso­ciation destroys society’s chief defense mechanism by violent and coercive conduct, or when that mechanism is blacked out by spe­cial privilege from government. For then, without the checks and balances of free men vying against free men in civilized competition, society lies as prone to exploita­tion by the unscrupulous as a rich store would be without guards and burglar alarms.

When the sources and compon­ents of union monopoly are under­stood, it becomes clear that the antitrust laws cannot cure the problem. The fundamental source is to be found in failures and er­rors of government which the most elaborately conceived antitrust laws could not cure. The basic job of government is to keep the peace. It has not kept the peace in labor relations. Local, state, and federal governments have all failed to pre­vent labor goons and massed picket lines from interfering with the freedom of action of nonunion em­ployees and of employers in bar­gaining disputes. A similar fail­ure in organizing campaigns has permitted unions which would be pygmies, if they represented only workers who wanted them, to be­come giants. The antitrust laws would equally clearly do nothing to remedy the monopolistic conse­quences of the positive aids granted by government to the big unions, such as the majority-rule principle and the virtual outlawry of small independent unions.

I am convinced that the socially dangerous aspects of big unionism have been brought about by the errors and failures of government which we have been considering. Government has on the one hand been tolerating the violence and economic coercion by means of which the big unions have attained their present power, and it has, on the other hand, positively inter­vened in their support. Moreover, for the last generation officers of the national administration have played a critical role in the key industrial disputes which have set the pattern of the so-called infla­tionary wage-cost push.

The latter is a much more im­portant fact than it may seem at first view. It suggests that the checks and balances of free enter­prise are adequate to protect the public even from the artificially constructed compulsory labor mo­nopolies which we now know. Moreover, it is not unreasonable to infer that those checks will work even more effectively if politicians not only stay out of negotiations but also enforce the laws against compulsory organization. These considerations suggest that the logical first step for those con­cerned about union power is to in­sist that government remove the present special privileges which unions enjoy and then wait pa­tiently, to see if the problem will work itself out without further government intervention.

Government’s Limited Role

I believe that the same approach should be taken in respect to busi­nesses suspected of monopolistic abuses. Rather than following the hit-or-miss political vagaries of the antitrust approach, it would be better to make sure that all special privileges, such as tariffs, exclu­sive franchises, and other govern­mental devices for blocking access to markets are withdrawn. Repeal of the tax laws which unfairly pre­vent high earners from amassing the capital necessary to compete with existing firms would also help much more than antitrust prosecu­tions do in promoting competition. In short, if government would con­fine itself to protecting property and contract rights, and if it would desist from impairing those rights, it would be doing all that govern­ment can do to promote competi­tion. And we should not need to be greatly concerned about monopo­lies and contracts in restraint of trade. For, as Mark Twain’s ac­count of the career of the river­boat pilots’ monopoly in the nine­teenth century demonstrates, the free enterprise system is in itself fully capable of destroying all abu­sive restraints upon competition which are not supported and pro­tected by government.

In the years before the Civil War, Twain writes in Life on the Mississippi, the river steamboat pilots formed an association which was to become, as Twain put it, "the rightest monopoly in the world." Having gone through many trials in building up its membership, a sudden increase in the demand for pilots gave the as­sociation its first break. It held members to their oath against working with any nonmember, and soon nonmembers began having difficulty getting berths. This diffi­culty was increased by the associ­ation pilots’ safety record, which grew out of an ingenious method evolved by the association for cur­rent reports on the ever-changing Mississippi channel. Since the in­formation in these reports was confined to members of the associa­tion, and since nonmembers had no comparable navigation guide, the number of boats lost or damaged by the latter soon became obvi­ously disproportionate. "One black day," Twain writes, "every cap­tain was formally ordered (by the underwriters) to immediately dis­charge his outsiders and take as­sociation pilots in their stead."

The association was then in the driver’s seat. It forbade all ap­prentices for five years and strictly controlled their number thereafter. It went into the insur­ance business, insuring not only the lives of members but steam­boat losses as well. By United States law the signature of two licensed pilots was necessary be­fore any new pilot could be made. "Now there was nobody outside of the association competent to sign," says Twain, and "consequently the making of pilots was at an end." The association proceeded to force wages up to five hundred dollars per month on the Mississippi and to seven hundred dollars on some of its tributaries. Captains’ wages naturally had to climb to at least the level of the pilots’, and soon the increased costs had to be re­flected in increased rates. Then society’s checks and balances went to work. This is Twain’s summa­tion:

"As I have remarked, the pilots’ association was now the compact­est monopoly in the world, per­haps, and seemed simply indes­tructible. And yet the days of its glory were numbered. First, the new railroad… began to divert the passenger travel from the steamers; next the war came and almost entirely annihilated the steam boating industry during sev­eral years… then the treasurer of the St. Louis association put his hand into the till and walked off with every dollar of the ample fund; and finally, the railroads in­truding everywhere, there was little for steamers to do but carry freights; so straightway some genius from the Atlantic coast introduced the plan of towing a dozen steamer cargoes down to New Orleans at the tail of a vul­gar little tugboat; and behold, in the twinkling of an eye, as it were, the association and the noble science of piloting were things of the dead and pathetic past!"

The moral: government’s job is done when it defends the right of competitive businessmen or workers to take over functions which are being abused by mo­nopolistic groups. The deeper moral is that monopolistic abuses rarely survive without a basis in one form or another of special privilege granted by government.

The steel strike would not have lasted nearly so long if govern­ment had effectively protected the right of the steel companies to keep their plants operating and the right of employees to continue working during the strike.

ASSOCIATED ISSUE

December 1959

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