Is our program in DANGER or Monopolized
Monopolies versus the Free Market,
by Gregory Bresiger,
Market domination that has been achieved in the private sector through efficiency and consumer satisfaction is a phenomenon of a free-market economy. Even without any competition, such a business can never take customers for granted because of the possibility that new entrants will enter the marketplace to compete. Indeed, big, well-established companies with large market share must constantly strive to satisfy consumers.
A monopoly created through the legal protection and the police powers of a state is something completely different. Here, the state makes it illegal for competitors to enter the market. This kind of privileged power inevitably institutionalizes inefficiency and discourages innovation.
Owners of big, successful businesses can never be sure that they will retain their strong position no matter how dominant they may look at a particular point in time. However, state monopolies are in a very different situation. They have a unique no-competition guarantee backed by the force of the state.
State enterprises with monopoly or quasi-monopoly powers can also draw on the inexhaustible powers of the government for tax dollars. But the damage done by state monopolies is greater than the billions of dollars in subsidies paid out by taxpayers. These adjuncts of the state can legally keep out would-be innovators who could put them out of business through competition.
State monopolies have an infamous background. One thinks of the salt or vodka monopolies conferred on politically connected court favorites or of monopolies invoked by divine-rights monarchs from Charles I to Russian tsars to German governments of the late 19th century and early 20th century. German governments, both imperial and democratic, organized more than 2,100 legally sponsored cartels. And woe unto the person or group that tried to compete with the state-backed enterprises.
By contrast, businesses that achieve total ?? or almost total ?? market share of what they produce are not protected from competition by laws. Such businesses depend entirely on customer satisfaction that comes from the business??s successfully fulfilling the wants of consumers. Such success is often short-lived. Despite the temporary strength of a successful business, it cannot force people to accept its products.
Neither Microsoft nor Wal-Mart, for example, can legally force a consumer to buy its products. Today these are large companies. But 10 or 20 years from now, they may well have gone the way of F.W. Woolworth??s. The latter was once a strong retailer. A previously strong company ?? such as IBM or Kmart ??could become weak and vulnerable as market forces pull it down.
Today Microsoft is a software giant. But its commanding market share is by no means assured. That??s because its power is non-coercive and, therefore, it must worry about competitors. Even today, Google, Mozilla, and Linux pose challenges to Microsoft??s domination. Microsoft must also always worry about new competitors offering new kinds of technology that could suddenly take away market share.
Yet antitrust regulators have had Microsoft in their sights for many years. In the 1980s, the regulators had IBM in their cross-hairs, only for their antitrust case to collapse after some 15 years of futility. In going after Microsoft today, or Wal-Mart tomorrow, the regulators may well be hurting a firm that will no longer be dominant in a few years because of market forces. In the meantime, that same firm could be continuing to successfully serve the wants and needs of millions of people.
Thus, here is one of the flaws in American antitrust law. The state goes after businesses that have become large precisely because they have been free to prosper by helping consumers.
The sorry record of antitrust laws
Possibly worse than state monopolies themselves have been the state efforts for more than a century to regulate and sometimes break up firms whose success is owed to their efforts in the marketplace. Yet the irony is that the government, which is the agency that has enacted and prosecuted antitrust laws, is the creator of some of the biggest monopolies. It is as though a convicted criminal had suddenly been put in charge of law-enforcement efforts.
Here is the philosophy of all antitrust thinking: Some prosperous American businesses are too powerful and, therefore, must be broken up or more closely regulated. Powerful monopolistic government enterprises with statutory powers to bar competition are beneficial and should be nurtured and supported.
In other words, don??t break up the U.S. Postal Service, which has a statutory monopoly for first-class mail delivery. But break up, or severely regulate, IBM, General Motors, Microsoft, or other business that has achieved its success in the marketplace.
By now, the process by which the government goes after large companies for antitrust violations is predictable. A business comes out of nowhere to dominate its field. It delivers a quality product at a dirt-cheap price (Wal-Mart) or provides rebates to favored customers (Standard Oil). Sometimes, it gives away some of its products (Microsoft).
At this point, competitors, backed up by consumer-interest groups, raise a ruckus and insist that the Justice Department intervene. Indeed, according to economist Dominick T. Armentano, 90 percent of all antitrust litigation has been brought by one firm against another. Armentano also points out that the
history of antitrust regulation reveals that these laws have often served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors.
This destructive alliance calling for antitrust action usually claims that the big, successful firm is exercising quasi-monopoly powers. It is supposedly crushing small competitors and soon it will be the only company in its field. Therefore, regulators, often at the urging of politicians and the press, presume that this big business ?? because of its rising market share or low prices or unique business practices ?? must be up to no good. It must have violated antitrust laws to have achieved its success.
So the antitrust reasoning, which has developed over decades, is that IBM must be punished. Microsoft must be broken up. Ruthless rate-cutting railroads should be taken over by the government. That last point was the suggestion made by myriad leaders in the Progressive Era, such as William Jennings Bryan and Herbert Croly.
The Progressives were influenced by the 19th-century populist-realistic fiction of Frank Norris. His unfinished trilogy of wheat novels painted a grim picture of an American economy swallowed by trusts. Another celebrated novelist of this period was Edward Bellamy, whose book Looking Backward in the 1880s predicted a perfect society that had abolished private property. This anti-capitalist, sometimes utopian, literature became contagious. It is perhaps why many of these monopoly statutes are unclear and not based on a logical or coherent economic theory.
The illogic of antitrust
The classic antitrust monopoly case is not brought by government against a company but rather by one company against a competitor. Usually, the ??offense? is that the competitor has engaged in aggressive price-cutting. But is it a case of ??predatory pricing,? which antitrust laws prohibit, or is it simply a case of a competitor??s trying to attract larger market share and larger gross profits with a lower price?
Obviously, it??s hard to tell. Antitrust enforcement can become an ??absurdity,? warned F.A. Hayek. ??Large firms are afraid to compete by lowering prices because it may expose them to antitrust action,? he wrote.
But if a firm is trying to expand market share by lowering prices, aren??t regulators and those looking to the government to protect them doing a disservice to the consumer? Access to the company??s products at below-market prices are a boon for consumers, many of whom presumably would be unable to buy the products without the company??s aggressive pricing strategies.
Moreover, how can the regulators know whether cost cutting, expanding market share, or even attempting to ??corner the market? is the actual goal of the company? Of course, another obvious question arises: Why is it necessarily a bad thing if there is only one efficient company in a particular sector?
Often only after numerous complaints from competitors that were once the top players in a field will regulators and lawmakers proceed against a business giant that has gained dominant market share or appears to be in a position to do so. Governments enact and enforce measures to stop the new business titan because it is supposedly engaging in ??unfair business practices.? For example, in New York City, zoning and other regulations have kept Wal-Mart out. That??s despite the obvious advantages this retailer would provide for city consumers, who face some of the highest prices in the country. (See my article ??Wal-Mart??s Not Coming to Town? in the October 2005 issue of Freedom Daily.)
Sometimes the federal government begins an investigation of the newly successful business. It takes many years and hundreds of millions of dollars of public funds. There are years of controversy and compelling newspaper copy. Debates go on in the courts and the halls of Congress. But frequently the cause célèbre ends with a whimper, and the case is settled out of court with a small penalty. Other times, the government just walks away from what was obviously a weak case.
Often the grounds for a supposed violation of the antitrust laws become moot over the years simply because the offending firm is no longer quite so strong as a result of a change in market conditions. For example, IBM, in the 1950s and 1960s, was the Microsoft of its time. Does anyone now want to initiate an antitrust action against the bedraggled Big Blue? I doubt it. An antitrust lawsuit against Wal-Mart would be welcome in many quarters today. But who wants to go after Sears or Kmart, two former giants who have fallen on hard times?
The Pennsylvania Railroad once was so strong that it was said to control state legislatures and regional economies. It had big, beautiful stations in many parts of the country, stations that are monuments to once-mighty railroads. The Pennsylvania Railroad rarely missed paying a dividend for more than a century. Yet where is the once-mighty Pennsy today?
Nevertheless, antitrust advocates continue to believe that, through their huge market power, such private concerns can impose their will on the consumer.
Antitrust officials claim to be representing this average person against the supposed unfair power of corporations. The officials claim that corporations exert too much market power that must be corrected by government, which of course requires extraordinary government powers to undo these economic injustices. Given these supposed economic injustices, antitrust advocates claim that big, successful businesses must be either broken up or highly regulated by the government.
Why do some think that successful firms are inherently evil? Why do many antitrust regulators actually believe that any firms that report consistently high profits should be under review by government officials?
One part of the regulatory argument is that almost all big corporations can exercise quasi-monopoly powers. Economists such as Joan Robinson and Edward Chamberlain in the 1930s warned of the economics of ??imperfect competition.? They also posited what they called ??monopolistic competition.? This could happen whenever a company or an owner could give his product a unique advantage, they said, which could be anything, including a particular location.
The New Deal??s chief trustbuster, Thurman Arnold, accepted much of this concept of imperfect competition. ??Mr. Arnold??s point,? said fellow New Dealer Raymond Moley, ??seems to be that competition becomes unfair if one party has a well-known trade name, whereas a competitor has no such well-known name.?
Arnold, who was responsible for antitrust prosecution through much of the New Deal, also warned of ??coercive advertising.? It was from here that one of the mainstays of antitrust thought developed. This is the so-called dependence effect. The most well-known advocate of this concept was the economist John Kenneth Galbraith, one of the most popular economics writers of our time. His writings were facile and often disparaged by many in the economics profession as superficial. Still, Galbraith is an easy read, and he had a remarkable ability to create bestsellers.
Under Galbraith??s celebrated dependence-effect scenario, consumers become suckers for the products of big corporations working in alliance with Madison Avenue. Consumers don??t buy things out of a spontaneous need, he wrote, but because producers ??contrive? goods and services to meet their production goals. They trick people into thinking they need increasing amounts of superfluous goods. He wrote,
If production is to increase, the wants must be effectively contrived. In the absence of the contrivance, the increase would not occur. This is not true of all goods, but that it is true of a substantial part is sufficient.
Without salesmanship and advertising, he added, the marginal utility of these corporate goods would be ??zero.? Yet it is easy to question whether the dependence effect really gives successful or dominant companies a stranglehold on consumer loyalties.
Dominance and the market
In the high-flying world of mutual funds, it is often said of hot and cold funds, ??And the first shall be last. And the last shall be first.? The same is true of any part of the business community in which market forces are allowed to operate with little or no interference.
Examples abound of corporations that at one time seemed to be the Wal-Mart or Microsoft of their time. Big, successful corporations seemed to impose the dependence effect on people. Yet today some big companies, such as GM and some of the airlines, are battling just for survival. Others, such as Woolworth??s and the Pennsylvania Railroad, are gone.
All of these one-time titans were brought low not by trust-busters but by competition, although certainly overregulation and imposed labor costs also played a part in their decline.
If these corporations ever had the quasi-monopoly powers imputed by Galbraith and many others, doesn??t it follow that they should all still be around and prospering? Indeed, Galbraith, whose theories were respectfully listened to by many in Congress and who tutored several presidents, nevertheless later hedged on this idea. Toward the end of his life, in a television interview with C-SPAN??s Brian Lamb, he conceded that he was surprised by the number of high and mighty American corporations that had gone under during the previous 30 or 40 years.
The Sherman Act
Several of these flawed antitrust concepts are embedded in the first federal antitrust law, the Sherman Anti-Trust Act of 1890. It was a law born in nebulousness, which set the precedent for the many other antitrust laws that would follow. The cloudy nature of almost all antitrust law means, depending on the zeal of a particular attorney general, that today??s acceptable business practice can be the basis for tomorrow??s antitrust lawsuit.
The antitrust litigation can run decades and cost tens of millions of dollars, with the government sometimes just abandoning the lawsuit, as we learned with the antitrust case against IBM. The tens of millions of dollars spent on antitrust lawsuits ultimately is taken out of the pockets of the shareholders and the consumers.
Let us look at the language of the Sherman Act and the opaque and paradoxical nature of the wording:
??Every contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade? is illegal. But what, exactly, is ??restraint of trade?? If Jewish storeowners in a neighborhood all agree not to open on Saturday, that will certainly restrain trade. But that won??t stop others from opening. And since this is a voluntary agreement, who is to say that one storeowner, whose business may be on the verge on failing, might not withdraw from the agreement? Moreover, if corporations A, B, and C agree to set a high price for a product, how do we know that a new business, corporation D, won??t suddenly come in and undercut all three?
Some 20 years ago the idea that a company called Microsoft would beat IBM was considered laughable. What was Microsoft? Who had ever heard of it? Yet everyone at that time knew that IBM was the 800-pound gorilla of the computer business. Those days are now long past. Many people who support vigorous antitrust efforts, who advocate more laws, don??t even know that this happened. Restraint of trade can??t envision all of the possibilities of competition today, tomorrow, and next year.
Another section of the Sherman-Anti Trust Act says that it is a crime to ??monopolize or attempt to monopolize, or combine or conspire ... to monopolize any part of the trade or commerce among several states.?
One legal commentator, Lawrence M. Friedman, has called the language of this landmark law ??vague.? He says the Sherman Act was ??something of a fraud.? That??s because the concept of restraint of trade was not clarified. The law, he added, reflected ??no particular economic theory.? It was merely designed to respond to complaints about the trusts of the late 19th century, just as some of the enforcement actions have been designed to respond to complaints about the biggest firms of today. Trustbusters tend to respond to political pressures, not to clear legal principles.
The fallacies of intervention
More important, the Sherman Anti-Trust Act set a precedent that would be followed again when Congress confronted what was perceived as a problem, economic or otherwise.
Pass a celebrated law, and then basically walk away from the tricky, politically divisive issue. If the issue becomes politically hot again a few years later, then pass another law. Politics requires that the rulers always seem to be doing something. Doing nothing is never a viable option in the modern democracy.
How do lawmakers accomplish perfection by statute? Write the law in a manner so difficult to understand that administrative agencies can interpret it in countless ways. For example, Sen. John Sherman clearly had no intention of breaking up trusts. He wrote the following of the Sherman Anti-Trust Act:
This bill does not seek to cripple combinations of capital and labor, the formation of capital partnerships, or of corporations, but only to prevent and control combinations made with a view to prevent competition, or for restraint of trade, or to increase the profits of the producer at the cost of the consumer.
Since there is no economic basis or logic backing the Sherman Act, monopoly law is based on an impossible dream of achieving economic utopia. It presupposes that regulators understand not only results of business activity but also the mindsets and motives of business people. The antitrust police also have the job of separating successful companies that have behaved legally from those that have conducted themselves illegally. At the same time, regulators must do all this in such a way as not to hurt consumers. Good luck!
Why should regulators do anything to combinations, when these often-temporary combinations also provide the consumer with the lowest possible prices? What happens when breaking up or punishing monopolies hurts the consumer? How does one know whether a business that cuts its price to the bone is trying merely to improve profitability or is engaged in a plan to put all competitors out of business? Why should it matter?
Monopoly law has no answer for these questions other than to invoke the repeated phrase ??restraint of trade.? In fact, the history of federal regulation of trusts is a strange one. It is a history of the federal government??s helping some businesses at the expense of others. It is a story of the federal government??s actually encouraging some trusts and some businessmen to look to the federal government for favors.
Indeed, without the backing of the federal government, it is questionable whether there would have been as many trusts. For example, seven years after the Sherman Act was passed, a Republican Congress and administration endorsed the Dingley Tariff. This high-tariff law was designed to grant protection for ??basic industries.? But what followed has been described as ??the golden era of trusts? in America. This was an eight-year period between 1897 and 1904 when 425 trusts were organized, with a combined worth of some $25 billion.
The federal government was creating trusts by giving favored corporations monopolistic positions. Yet this was an era when President Theodore Roosevelt was publicly celebrated as a trustbuster. More contradictions in American monopoly law were to follow.
There were also succeeding acts to the Sherman Anti-Trust Act, which furthered the contradiction of these confusing rules. For example, later antitrust laws, such as the Clayton Act and the Robinson-Patman Act, were ??explicitly intended to restrict price rivalry in the name of competition,? according to one commentator, Dominck T. Armentano. But here again it was the consumer who was paying higher costs, which the original Sherman Anti-Trust Act was supposed to prevent.
These would-be monopoly-destroying laws appear to be based on a mistaken understanding of the nature of competition. Competition is no more perfect than human beings. Yet competition can take many forms. It can take place within an industry. It can take place within a sector of an industry. It can take place within different parts of a firm. It is part of a discovery process that can include various firms that cooperate in the temporary pursuit of a common goal.
But even in the case of cartels that have been created without the support of the government, it is impossible to expect that all firms will agree at all times.
This was, for example, the case of several Eastern railroad executives who met in New York City in what would turn out to be a futile effort to fix prices. The so-called St. Nicholas Agreement of 1854 lasted barely six months because of ??the inability of the roads to abide by the provisions,? according to one railroad historian. These railroads had sought to impose a dependence effect on their customers, but they failed.
Genuine monopolies
Genuine monopolies are those enterprises that are protected from competition by force of law. If a competitor attempts to enter the market against the government-sanctioned enterprise, the government shuts him down.
A diligent student can search through history to find endless examples of pernicious state monopolies or government entities with quasi-monopoly powers.
For example, in the Case of the Monopolies of 1602, a British court ruled that an exclusive monopoly conferred by Queen Elizabeth for the manufacture of playing cards was against the common law, which protects freedom of trade and liberty of the subject.
Eight years later, in the celebrated Case of Dr. Bonham and four years after that, in the Case of the Tailors of Ipswich, the Court of Common Pleas ruled against a state-sponsored guild that tried to prevent people from practicing a trade.
??The Common Law doth abhor all Monopolies, which forbid any one to work in any lawful Trade; ... That at the Common Law no man might be forbidden to work in any lawful Trade, for the law doth abhor idleness, the mother of all evil,? wrote Lord Edward Coke. Coke??s ideas of government under law helped defeat divine-right monarchy and led to the constitutional settlements of the Glorious Revolution of 1688.
America??s Founding Fathers were astute students of Coke and the English Whig tradition. But this suspicion of state control of the economy ?? like the rest of the American classical-liberal tradition ?? has obviously been in retreat for more than a century. In part this is because millions of state-educated Americans know little or nothing about the libertarian tradition that enunciated and guaranteed the freedoms associated with the right to own property, a basic human right. So Americans simply take liberty for granted, or don??t understand its myriad virtues.
Perhaps the granddaddy of the American state monopoly is the United States Postal Service. The system is in reality devoted to the principle of not allowing others to do a better job. Or as James Bovard has written,
America??s postal system is based on the idea that it is better to trust a public monopoly to provide service out of its sense of obligation than to trust companies to provide good service out of sheer necessity ?? that an organization is more likely to serve the public when it has no competition and a guaranteed income than when it must fight for customers.
The Postal Service zealously protects its legal monopoly in the delivery of first-class mail. And woe unto the children who deliver Christmas cards for less than the government monopoly price. The police powers of the state will come down on them heavily.
A Chinese economist has labeled a government-backed monopoly as an ??administrative monopoly.? He says it is ??a group-based corruption? protected by laws. Many people can agree with this sentiment in theory but carrying it out is another thing. Expecting a state monopoly to break itself up is as logical as expecting a tyrant??s mea culpa. It isn??t just the state monopoly itself that is the problem; it is also the friends in high places that ensure that state monopolies go on and on.
When, for example, can one remember a recent serious effort in Congress to take away the monopoly powers of the postal service? That??s because many of the members of Congress receive financial help from the postal unions, whose membership numbers in the hundreds of thousands. Those unions represent a formidable force against competition. As is customary with monopolies, the status quo is beneficial for monopoly employees ?? it provides them better pay and benefits than they might obtain in the competitive private sector. And those who work for the Postal Service know that if first-class mail delivery were ever opened to the private sector, the postal monopoly??s stability and viability would inevitably be threatened.
In the end, anti-monopoly laws are more than counterproductive. They are, and will always be, harmful to a free-market economy and, more fundamentally, to a free society. There is only one reasonable anti-monopoly policy: End government monopolies and repeal anti-monopoly laws.
