Efficiency, Power, Freedom

C. Robert TaylorAuburn University

Presentation at AAEA annual meeting, 2011

Competition Issues Go Well Beyond Efficiency Calculations

Numerous theoretical and empirical competition analyses by academic and government economists have dealt exclusively with aggregate economic efficiency and prices

Economic surplus (efficiency) is based on a house of cards

Many questionable assumptions

Some lose sight of the implicit value judgment underlying efficiency

Efficiency has become ideology for some

No such thing as value free welfare economics (Blaug)

Competition Issues Go Well Beyond Efficiency Calculations

Efficiency is important, BUT …

Other economic, social, political and institutional effects are likely more important in our present situation

ConcernsEquity & fairness

Economic discrimination

Justice

Consumers driving the system, or the system driving consumers (Breimyer)

Control of innovation

Independence

Economic freedom & liberty

Serfdom

Economic Power translates into Political Power

Threat systems (Boulding)

Evolution of economic systems and irreversibility

These considerations have largely fallen out of economists’ vocabulary

A Few Examples--vertically integrated poultry industry--

All-or-Nothing Monopsony more accurate representation of the poultry industry than textbook monopsony

Efficient, but the monopsonist extracts all intra-marginal suppliers’ surplus

Efficient? Yes.Unfair? Inequitable? Probably.

A Few Examples--vertically integrated poultry industry--

When push comes to shove, a poultry growers is nothing more than a serf … with a mortgage

Evolved to more of a threat system (Boulding)Many growers “threatened” by integrators to not attend DOJ/USDA Competition Workshops!

Contracts of Adhesion

Poultry industry is nothing more than a modern plantation system

Is this what society desires?

A Few Examples--cattle feeding industry--

Captive suppliers quickly replacing independent feeders desiring to sell on the cash market

Many “inefficient” feeders have exited the industry due to market pressure. OK.BUT some efficient feeders have also exited because they were paid substantially less for like quality cattle than some of the large captive feeders, the chosen ones.Or were boycotted by packersIs this fair?

A Few Examples--cattle feeding industry--

Large captive feedersFrionia Industries and Cactus Feeders have a one-time feedlot capacity of ¾ million head.

Each practically locked into a single packer, which makes them vulnerable for exploitation as independents exit the industryLarge captive feeders may be serfs (but don’t know it … at least not yet)

Invitation Only!

With vertically integrated and horizontally concentrated markets …

Entry into agricultural production is increasingly by invitation only

Economic implications? Does this have a price?

The American Dream—the potential for independently starting your own business and becoming successful—is being replaced by a system in which you can gain entry only by kissing up to a corporate executive or through familial ties

Individual Freedom

“ … the significance of vertical integration as an institution of agriculture is judged best from the standpoint of market structure. In particular does that approach to a study of integration shift the focus from its meaning in isolated cases—which may be insignificant—to what would result if it were to become pervasive. In this light, vertical integration appears the greatest threat to individual freedom in agriculture …” Breimyer

The Road(s) to Serfdom

There are many roads to serfdom for the massesHayek warned of the danger of economic tyranny and serfdom that results from control of economic decision making through central planning by a fascist or socialist government

Central economic planning inherent in a vertically integrated and horizontally concentrated industry may also lead to serfdom.

That road is paved with efficiency

We have traveled far down that road in the poultry industry and more recently in the pork and fed cattle industries

The Heart of the Debate

“The salient feature of industrialization of agriculture and the food system is that it replaces the time honored system of markets. It substitutes centralized management for open exchange markets as the principal, though not exclusive, coordinating instrument. …that is the heart of what the argument is about. “ Breimyer

Antitrust Laws

Antitrust is a Populist notion that took hold during the ‘Robber Baron” period

Sherman Act, 1890Clayton Act 1914Divestiture of meat packer cartel, 1920Packers & Stockyards Act, 1921Capper-Volstead Act, 1922

Antitrust Laws

Broad social objectives initially

But economists have “had their way” leading to narrow interpretation of Antitrust Laws

Judge Posner’s view of an economic approach to antitrust law based essentially on consumers’ surplus has come to dominate case law

Packers & Stockyards Act (PSA)

Attempts have been made to impose the efficiency ideology on the Packers & Stockyards Act

YET, the word “efficiency” is not to be found in the PSA law. Not once.

Prevalent words in the PSA are unfair, unjustly discriminatory, undue or unreasonable preference, deceptive practice, manipulation of prices, division of the market

The word efficiency is not in Sherman or Clayton Acts, either.

But efficiency is the evaluation concept many economists try to impose on the Law

Early Interpretation of Antitrust Law

"[I]t is not for the real prosperity of any country that such changes should occur which result in transferring an independent business man . . . into a mere servant or agent of a corporation . . . having no voice in shaping the business policy . . . and bound to obey orders issued by others.” Justice Peckham

Early Interpretation of Antitrust Law

“The most significant evil at which the antitrust laws are aimed is the evil of absentee ownership and industrial concentration that makes for such depressions. We were slow to learn after 1929 that great corporate organizations cannot continue to take money out of local communities without somebody putting it back.” Thurman Arnold

Fight without a Referee

“[T]he competitive struggle without effective antitrust enforcement is like a fight without a referee.” Thurman Arnold

Ethics of Competition

“As long as we had the frontier and there was not only ‘room at the top’ but an open road upward, the problem (distribution of economic power, opportunity and prestige) was not serious. But in a more settled state of society, the tendency is to make the game very interesting indeed to a small number of ‘captains of industry’ and ‘Napoleons of finance,’ but to secure this result by making monotonous drudgery of the lives of the masses who do the work.” Frank Knight, 1923

Broad Social Goals

"The growth of bigness has resulted in ruthless sacrifices of human values. The disappearance of free enterprise has submerged the individual in the impersonal corporation. When a nation of shopkeepers is transformed into a nation of clerks, enormous spiritual sacrifices are made." Justice William O. Douglas, 1936

Individual Freedom

“ (vertical) integration is not primarily a means to efficiency but an instrument of power.” Breimyer

Evolution of Economics

Increasingly narrow, focused on economic efficiency

As if these calculations were value free

Early 1900s similar in many ways to our current socioeconomic situation

Even Frank Knight cautioned against the single-minded pursuit of economic efficiency

Maintained that the proper role of government was to balance (a) economic efficiency, (b) an acceptable balance of power, and (c) economic freedom

Knight’s broader framework seems much more appropriate than efficiency alone

Final RemarksEconomists need to rediscover the purposes of antitrust laws.

The need for their enforcement has never been more acute than now

The need for economists to broaden their view of competition issues has never been more acute than now

It’s is NOT about efficiency!

It IS about the kind of economic system that will prevail

It IS about equity, economic opportunity, and Democracy

If economists will not draw attention to the tradeoff between efficiency and equity, who will? (Blaug)