lopez breaking up antitrust

8/8/2019 Lopez Breaking Up Antitrust

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THEFREEMANIDEAS ON LIBERTY

Breaking Up Antitrustby Edward J. Lopez

I n one of the most famous passages in TheWealth of Nations, Adam Smith cautions,"People of the same trade seldom meet

together, even for merriment and diversion,but the conversation ends in a conspiracyagainst the public, or in some contrivance toraise prices . . . ."Supporters of antitrust laws believe that

Smith couldn't speak the truth more plainly.They deem this sort of anticompetitive be-havior bad for consumers. Antitrust regula-tion, they argue, is necessary to protect com-petition and the well-being of society fromthese kinds of conspiracies.But is Adam Smith right? He correctly

warns of the natural incentive that businesseshave to get the highest price possible for theirproducts, and perhaps to monopolize theirindustry or collude with one another to in-crease prices. One might legitimately con-clude that free markets cannot always be leftfree, and that government institutions likeantitrust are necessary for the protection ofsociety's interests.As awful and ridiculous as this may sound,

peoplewho love freedom must take this claimseriously. Antitrust supporters generally havea strong foundation, not only in Adam Smith,but in much of the conventional economictheory of the twentieth century. Economistshave at their disposal powerfully convincingways of showing that monopoly is harmful,

Mr. Lopez is Charles G. Koch Research Fellow at theCenter for Market Processes and H. B. EarhartDoctoral Fellow in economics at George MasonUniversity.

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and that antitrust enforcement is the perfectremedy, at least in theory.The real world also provides plenty of

examples that support the claims of antitrustsupporters. The kind of behavior that Smithdescribes does indeed occur. One such casewas the notorious fare-fixing telephone con-versation initiated by American Airlineschairman Robert Crandall with Braniff pres-ident Howard Putnam in 1983. 1

The early 1960s gave us another infamousexample. General Electric, Westinghouse,Allis-Chalmers, and 1-T-E coordinated a per-vasive price conspiracy in selling heavy elec-trical equipment to the government. A singlecompany would enter a bid lower than all its"competitors," all of whomwould enter iden-tical bids higher than the lowest. In oneinstance, seven different companies entered abid of exactly $198,438.24, and the contractwas 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 ifnot for the cartel's ingenious enforcementstrategy. The firm to enter the lowest bid wasdetermined by the fullness of the moon. This"phase of the moon" strategy was foolprooffor decades, and was only discovered in 1959by a reporter in Tennessee, who noticed thepeculiarity of the identical bids. The conspir-acy is estimated to have cost consumers $175million in every year of its decades-longexistence. 2

These examples illustrate the creativity thatbusinesses sometimes use in trying to monop-olize a market. When cartel members can


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24 TH E FREEMAN JANUARY 1997

actually enforce the agreement, or when a firmactually succeeds inmonopolizing a market, theresult is almost invariably bad for consumers. 3

Whether antitrust enforcement does the job ornot, we still need to take the threat ofmonopoly

seriously. And we still need to recognize andacknowledge 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 thejob? Do we need to agree that antitrust dealseffectively with the threat of monopoly andthat it is therefore good for society? Theanswer is clearly no. In fact, sober economicanalysis can explain how antitrust policy failsto combat the monopoly threat, how it betraysthe public interest it is pledged to protect, and

how it therefore serves the private interests ofthe businessmen, politicians, and bureaucratsinvolved. In short, we need to voice thereasons why the antitrust laws should berepealed. 4

Antitrust Enforcement:The Ideal Versus the RealOne would rightly be suspicious to discover

that antitrust laws in this country are enforcedby two separate federal agencies, the Anti-

trust Division of the Department of Justiceand the Federal Trade Commission. 5 Eachagency is subject to Congress byway of budgetappropriation, confirmation of appointees, andgeneral oversight into agencyactivities. Becauseof this oversight, we can be fairly certain that theagencies enforce the statutes according to thewishes of the current Congress. 6

In a perfect world in which Congressmenare public servants, antitrust should work theway it is supposed to. We should expect thatonce Congress allocates an amount to each

agency, staffmembers there take an inventoryof the monopoly inefficiency in the economy,make a list according to the costs to society,and bring cases against these monopolies inorder of their importance until their budgetsare exhausted. There might be some red tapeand pre-investigation procedures to worryabout, but overall this seems to be the way itshouldwork. What betterway to make societybetter off? How much better can a policy get?

Unfortunately, the naive assumption thatthere is a "public-interest" standard in gov-ernment dominates discussions of antitrustand in so doing abstracts entirely from theexistence an d power of special interest

groups. Policies that were introduced in thename of promoting competition have becometools to protect against competition. Con-gress, businesses, and the antitrust bureau-cracy all have much at stake in the antitrustgame. They form a triangle of private intereststha t drive antitrust enforcement a t the ex-pense of the general public.

The Antitrust BureaucracyFirst, consider the incentives of those who

are in charge of enforcing the antitrust stat-utes. At the Antitrust Division, there are 331attorneys and 50 economists, while the FTCmaintains a comparable 435 attorneys and 63economists. These agencies are hierarchicaland experience much of the red tape that anygovernment bureau does. But at some point,every decision is made by an individual, whohas his own career agenda and objectives.One study of the Antitrust Division 7 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 theprivate marketplace. There was a clear in-crease in the demand for these skills so thata young lawyer had a great deal to gain byworking in the Antitrust Division. What'smore, he or she had even more to gain fromthe specific experience of arguing cases at trialin the federal courts. Lawyers at the AntitrustDivision have every incentive to choose casesthat will go to trial, and go to trial quickly,regardless of the efficacy of the action in

combating monopoly, or its effect on con-sumer welfare.A similar study focuses on the FTC. 8 The

study found that the ultimate career objectiveof most FTC lawyerswas a job at a prestigiousprivate law firm. Robert Katzmannwrites thatsome cases "threaten the morale of the staffbecause they often involve years of tediousinvestigation before they reach the trialstage."g Therefore, the FTC opens "a number


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of easily prosecuted matters, which may havelittle value t o t he consumer . . . in an effort tosatisfy th e staff's perceived needs."10 On eFTC attorney is quoted in th e study as saying,"for me, each complaint is an opportunity, a

vehicle which someday could take me intoth e courtroom. I wan t t o go to t rial so badlythat the re are times when I overstate th epossibilitieswhich th e particular matter mightoffer."11

I t' s clea r f rom studies like these t ha t t heantitrust bureaucracy doesn't select cases toprosecute on th e basis of their potential ne tbenefit to society. Instead, th e staff at FTCa nd t he Antitrust Division use th e discretionthat they do have to further their own privateinterests and careers rather than those of th e

public at large. The antitrust bureaucracycanno t be count ed on to uphold the publicinterest in enforcing antitrust laws.

The CongressAlthough th e antitrust bureaucrats would

like to exercise complete control over theirenforcement agendas, they ar e ultimatelyaccountable t o t hei r congressional oversightand appropriations committees. Now, con-sider th e incentives of members of Congress.

The goal formost members is to get re-electedor ascend to a higher office. There is a muchgreater chance that this will happen i f theysupport local or narrow interests rather thansome vague notion of th e national or publicinterest.Antitrust is one of many pork-barrel pro-

grams that Congress uses to transfer wealthfrom large, unorganized groups of individualsto the narrow, organized interests of others.In many ways, antitrust is th e perfect wealth-transfer vehicle. I t is highly inconspicuous,

covering th e entire economy rather than justspecific industries. I t applies to specific busi-ness practices, and can therefore be used toprotect less efficient companies from theirmore efficient competitors. Ant it ru st c antherefore deliver potent benefits (directlylimiting th e competitiveness of one's rivals),while th e costs occupy a tiny line on th efederal budget and are hardly noticeable atall. The stockholders of th e protected com-

BREAKING UP ANTITRUST 25

pany gain at th e expense o f t he stockholdersof t he mor e efficient, yet legally hampered,competitor.

The evidence on th e matter is clear. Anti-trust enforcement falls less stringently on

companies headquartered in th e congres-sional districts of members on the key com-mittees with oversight and budget authorityover th e antitrust bureaus. 12 And if a com-mittee's membership changes significantly,th e ant it rust bureaucracy changes as well.After t he 1976 and 1978 elections, th e keyoversight committees experienced rapid turn-over of its members. P ri or t o that, th e FTChad a very avid enforcement agenda. But t henew committee members found their constit-uent interests demanded a different ap-

proach. Ther efor e, in 1979, th e Congressblasted th e FTC as a runaway and out-of-control bureaucracy. After a series of heatedhearings, th e FTC systematically watereddown or simply halted most of its controver-sial activities. As th e currents change inpork-barrel waters, so too does th e antitrustbureaucracy.

Other aspects of antitrust also reveal pri-vate interests at work. While th e originalSherman Act was ostensibly supposed to reinin the "dangerous concentrations of wealth"

among th e "giant monopolies" of th e day,history reveals little monopoly power existedat th e time. Priceswere falling throughout th eeconomy and output was surging.

13This only

serves to benefit consumers, and Congresseven recognized th is as t rue.

14So why did

Congress enact an antimonopoly law in suchan apparently competitive climate? Becauseth e law protected small or inefficient busi-nesses from th e rigors of competition, and itportrayed Congress as a champion of justiceand freedom. Other studies find similar re-

sults for th e Clayton Act.15

Still other studiesshow that antitrust no t only fails to benefitconsumers, bu t also harms them.

The conclusion from examining th e incen-tives created by antitrust laws, and actionstaken under them, is that antitrust laws dono t serve th e public interest as their support-ers would claim. Antit rust does no t combatth e monopoly threat, but rather protects lessefficient companies from their competitive


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26 THE FREEMAN JANUARY 1997

rivals, bolsters th e political capital of mem-bers of Congress, and furthers the careers ofWashington bureaucrats. In shor t, the onlything that antitrust makes more efficient is thecozy triangle of special interests.

ConclusionClassical liberals should take the threat of

monopoly seriously. But the answer to thisthreat is not antit rust laws. Any potentialmonopoly must instead be exposed to thediscipline of market competition. Econo-mists have long made convincing argumentsthat a natural monopoly is rare. Most mo-nopolies exist because of government inter-vention. By repealing antitrust statutes, and

ending government-sponsored monopoly,we will al low th e t hr ea t o f monopoly to bedealt with in th e most effective mannerpossible: t he marke t process.

Adam Smith rightly warned us of the dan-gers of business conspiracies. But in the samefamous passage quoted earlier, he went on towarn of the even greater danger of relying ongovernment institutions to combat it:

I t is impossible indeed to prevent such meet-ings, by any law which either could be executed,or would be consistent with liberty and justice.

But though the law cannot hinder people of thesame trade from sometimes assembling to-gether, it ought to do nothing to facilitate suchassemblies; much less to render themnecessary. []

1. Howard Putnam taped this conversation. It was entered asevidence in the case brought by the government against AmericanAirlines and Crandall. Quoted from Roger E. Meiners, AI H.Ringleb, and Frances L. Edwards, The Legal Environment o fBusiness, 3rd ed., p . 401 .

2. Dennis W. Carlton and Jeffrey M. Perloff, Modem Indus-trial Organization, pp. 181-183, and Richard A. Posner, "The

Social Cost of Monopoly and Regulation," Journal o f PoliticalEconomy, 83:807-827.3. Probably most successful monopolization is achieved

through government protection.4. A compelling case has been made along theselines by D. T.

Armentano. See Antitrusta nd Monopoly (New York: JohnWileyand Sons, 1982) and Ant it rust Policy: The Case for Repeal(Washington, D.C.: Cato Institute, 1986).

5. This arrangement has been the subject of widespread andextensive criticism, which typically calls for the elimination of theFTC. See Richard S. Higgins, William F. Shughart II, and RobertD. Tollison, "Dual Enforcement ofthe Antitrust Laws," inRobertJ. Mackay, James C. Miller III, and Bruce Yandle, eds., PublicChoice and Regulat ion: A View from Inside the Federal TradeCommission (Stanford, Calif.: Hoover Institution Press, 1987).

6. Barry R. Weingast and Mark J. Moran, "BureaucraticDiscretion or Congressional Control? Regulatory Policymakingby the Federal Trade Commission," Journal o f Political Economy,October 1983, 91:765-800.

7. Suzanne Weaver, The Decision to Prosecute: Organizationand Public Policy in theAntitrust Division (Cambridge: MIT Press,1977).

8. Robert A. Katzmann, Regulatory Bureaucracy: The FederalTrade 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 Pork-barrel," Journal of Law and Economics, 15:329-342, 1982.

13. Thomas J. DiLorenzo, "The Origins of Antitrust : AnInterest-Group Perspective," International Review o f L aw a ndEconomics, 5:73-90, 1985.

14.Ibid., pp. 80-81.15. Robert B. Ekelund, Michael J. McDonald, andRobert D.

Tollison, "Business Restraints and the Clayton Act of 1914:Public- or Private-Interest Legislation?" in Fred S. McChesneyand Will iam F. Shughart , The Causes and Consequences o fAntitrust: The Public Choice Perspective (Chicago: University ofChicago Press, 1994).

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