Chicago School Economists Got it Wrong. Strong Antitrust Policy Boosts the Economy.

Yves here. Intellectual and public support is necessary but not sufficient for officials and courts to take on companies with excessive market power. One way is to break them up. The other is to regulate them. I’m not at all sympathetic to the whinging of the likes of Facebook that it would be hard to dis-integrate business they’d acquired not that long ago. Help me. This is all bloody code. It’s not even remotely like going to Mars. Remember back in the days of the Microsoft antitrust suit, there was serious talk of forcing Microsoft to unbundle Word and Excel….and Wall Street was keen about the idea. They thought the two applications would perform better, both financially and functionally, if they were hived away from the mother ship.

As for regulation….prohibitions and strict oversight can be very effective, as the US demonstrated in from New Deal era thought the 1970s, when concerted right-wing messaging helped grease the wheels for political challenges. Sadly as a result, even now the US seems to be short on people in senior positions who believe that saying “no” to businesses is necessary and salutary.

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

There’s a reason people talk about the current American era as the New Gilded Age. A giant gap between haves and have-nots, mammoth corporations throwing their weight around, financial firms (hedge funds this time around) calling the shots, politicians captured by the rich – it’s all back with a vengeance. Instead of Standard Oil, we have goliaths like Google, Amazon, and Facebook allowed to grow so powerful they threaten not only consumers and competitors, but the entire economy — and even democracy itself. Current antitrust policy, however, is not up to the task of restoring balance between big business and everybody else.

The University of Utah’s Mark Glick, who teaches law and economics, antitrust law, and industrial organization, joins the Institute for New Economic Thinking to talk about the history of antitrust thinking and its sharp turn towards the interest of big business in the 1980s. He explains the importance of reinvigorating antitrust policy, examines proposals to do so, and sheds light on why it matters to the wellbeing and prosperity of the country.

Lynn Parramore: Let’s go back to the beginning of antitrust policy in the United States. The Sherman Act passed in 1890, targeting monopolies and anti-competitive behavior. Why did the U.S. do this sixty years before any other country had a major antitrust statute?

Mark Glick: In the late 19th century, the rise of big business in the U.S. fostered enormous opposition from farmers, labor, and small business. The emerging big businesses were aggressively forming cartels and trusts, and the abuses of the trusts fostered a significant public outcry that prompted Senator John Sherman to introduce the Sherman Act into Congress 1888.

By this time, the political power of big business and these other classes that were impacted by the trusts in Congress was about equal. Representatives of big business in Congress opposed the Sherman bill because they claimed it trampled on their freedom of contract, the right to enter into contracts with other firms as they wished. On the other side, the farmers, laborers, and small businesses wanted free competition, which meant a limit on the power of big business.

Congress debated the bill for 18 months with no resolution. Finally, within a week, in April 1890, a redrafted bill emerged from the judiciary committee. The final floor vote on the bill was unanimous (one dissenter in the Senate). The explanation for this sudden, newfound unanimity was that the bill was ambiguous – each side could read into what they wanted. The bill stated that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade … is declared illegal.” Those on the side of big business hoped that “restraints of trade” meant “unreasonable restraints of trade,” which suited them because they didn’t think most restraints of trade were unreasonable at all. But representatives of farmers, labor, and small business interpreted “every” to mean “every restraint of trade,” which made them think that the power of big business would be significantly curtailed.

LP: What happened after the Sherman Act was passed? How did this ambiguity get resolved?

MG: In the U.S., political power is divided between the three branches of government. In the late 19th and early 20th centuries, big business held substantial political influence in the executive branch, and that’s where an antitrust case by the government must begin. The big business-oriented presidencies meant that after the passage of the Sherman Act, the Harrison, Cleveland, and McKinley administrations brought few antitrust cases against business. Instead, the Sherman Act was primarily used against labor to limit strike activity. It’s interesting that the only person ever to go to jail as a result of antitrust enforcement in these decades was Eugene Debs, a labor leader and socialist party member.

In the meantime, a few cases against business mainly involving railroad agreements reached the Supreme Court. During this period, even though the Supreme Court embraced laissez-faire and substantive due process (a doctrine that limited business regulation because it allegedly violated the “liberty” interests protected by the 14^th Amendment), Judge Rufus Peckham in Trans-Missouri Freightheld that “every” restraint of trade means “every restraint of trade.” This was a view supportive of the non-big business groups. But by 1911, in the Standard Oil case, a new majority on the Court held that only “unreasonable restraints of trade,” not “every” restraint of trade violated the Sherman Act. This has remained the rule since. So on antitrust, big business got the potential to argue a profitable restraint was “reasonable.”

LP: In his latest book, “Liberty from All Masters,” Barry Lynn argues that the Wilson Administration represents the golden years of antitrust in America. Wilson’s vision for the country, known as the “New Freedom” platform, included taking strong antitrust actions against the big corporations that were dominating the country’s economy. Should antitrust today try to mimic Wilson’s New Freedom?

MG: Setting aside that Wilson was openly racist and antilabor, his administration did pass the Clayton Act, which dealt with issues like business mergers, and the FTC Act, which concerned unfair competition.

But Wilson was not the populist Lynn claims. Wilson thought big business had been progressive and in the public interest. The Clayton Act and FTC Acts were in line with the political interests of big business and were supported by the National Civil Federation, the leading lobbying group for big business at the time. Big business wanted specific anti-competitive conduct spelled out (the Clayton Act) and a commission that could immunize business strategies in advance (the FTC Act). This is what Wilson delivered. Wilson also opposed a solid labor exemption from the Clayton Act and Sherman Act and as a result, federal judges issued hundreds of anti-labor Sherman Act injunctions in the 1920s. It definitely wasn’t a golden age of antitrust for labor.

Nonetheless, the passage of these antitrust laws was an advance. The Clayton Act addressed merger control (but contained loopholes repaired after World War II) and gave state attorneys general and private parties standing to bring cases. The Federal Trade Commission (FTC) also evolved into an effective antitrust enforcement agency.

LP: Where should progressives today look for a model for better antitrust enforcement? And why is it so important?

MG: The model for antitrust policy should be Roosevelt’s New Deal policy consensus, which lasted from approximately 1933 to the middle 1970s. Strong antitrust policy was a key part of the New Deal policy consensus. However, antitrust was embedded in an ensemble of policies, which included the suppression and regulation of finance, support for unions and organized labor, government investment in infrastructure and innovation, a social safety net, and Keynesian macroeconomic policy. Each of these policy changes occurred to different degrees and with different timing. Later, Johnson’s Great Society Program would add racial justice to the policy mix (the original New Deal made concessions to southern democrats to secure passage).

It often goes unrecognized how effective New Deal policy was for the American economy. As Northwestern economist Robert Gordon has shown, productivity soared in the 1930s and 1940s as high wages encouraged electrification and adoption of other innovations. Leading scholars of innovation find that the decades of the 1930s and 1940s produced more basic innovations than any other American decades before or after.

The New Deal consensus extended until the crisis of the late 1970s. The mixed economy produced higher GDP growth, higher labor productivity, lower unemployment, lower income inequality, and higher investment than the decades before or after. An integral part of this success was strict antitrust enforcement. The paradigm cases for antitrust enforcement during the New Deal consensus were United States v. Socony-Vacuum Oil Co. and United States v. Philadelphia National Bank. Socony Vacuum established a broad per se rule for horizontal conspiracies, and Philadelphia National Bank created a presumption of illegality for mergers that resulted in concentrated markets. Beyond this, the Supreme Court made it clear that the goal of antitrust enforcement included protecting political democracy from undue influence by big business.

LP: If robust antitrust policy is critical both to the economy and to democracy itself, what caused the about-face during the Reagan Administration?

MG: In the 1980s, neoliberal policies began to replace the New Deal policy consensus. Proponents of the neoliberal ideology pushed to have finance deregulated, unions were decimated, and top tax brackets were reduced. These policies aimed to, and succeeded at, raising the incomes of the wealthy mainly through the financial sector. But they were presented as universally beneficial because they were said to make the economy more efficient.

A school of economic thought known as the Chicago School promoted a framework for weakening antitrust based on the claim that business strategies once thought to harm competition actually increased “efficiencies.” The central theme was that antitrust should be guided by something called the “consumer welfare standard.”

The label was deceptive: it appears to mean that the point of the standard is to improve the situation of consumers. The idea, so they claimed, was to evaluate business conduct and mergers by whether they increased overall efficiency. But in the fine print, they meant something else: not economic efficiency as taught to economics graduate students, but “consumer surplus,” stripped of the problems and caveats. This was simply introductory textbook economics: it’s the gap between what you would be willing to pay for something like a TV and what you actually bought it for. The problem is that this standard just takes the existing distribution of income as given. What you are willing to pay for something depends on how much money you have. It’s not some absolute standard of welfare, and you can’t measure it without making heroic assumptions. All this was hidden from view and the consumer welfare standard took over the antitrust world in the U.S. and abroad.

LP: Why did the consumer welfare standard become so popular?

MG: Consumer welfare has always been a misrepresentation of economics promoted by proponents like the conservative jurist Robert Bork and Chicago School economists.

It’s not a measure of efficiency. While undergraduate textbooks in economics sometimes confuse this issue, in graduate-level economics and in the specialized field of welfare economics, it’s clear that efficiency means what economists call “Pareto efficiency.” Pareto efficiency takes the initial distribution of resources and goods for granted. Then, efficiency is enhanced when no one is made worse off and somebody’s situation is improved. Pareto efficiency doesn’t apply to antitrust, though. Antitrust involves litigation where there are winners and losers. An outcome can’t be Pareto efficient if there is a loser. In fact, Article III, Section 2 of the Constitution does not allow legal cases to proceed if there is no “case or controversy” — meaning a potential winner and loser. The Chicago School has been muddling the whole issue.

Consumer welfare just isn’t meaningful economics. It’s branding for limiting antitrust to scrutiny of product price, product quality, and innovation. But antitrust enforcement in the New Deal consensus also pursued goals of limiting concentration, keeping entry open, protecting small business, and political democracy. Today, antitrust should be used to protect workers and the economy when it can. For example, the Department of Justice (DOJ) has allowed thousands of bank mergers to occur, closing its eyes to problems such as greater instability from financial interconnection and too big to fail concerns. Antitrust is part of a policy regime and there is no reason for agencies to ignore obvious economic or political concerns from mergers.

Bottom line: there is no economic science involved in the consumer welfare standard. It was always merely a marketing device to advance the neoliberal agenda in antitrust. For all the talk and concern about efficiencies in the last few decades, what has actually resulted is an economy with lower investment, lower productivity, lower employment, and greater inequality than under the New Deal consensus. Plus, it is now widely acknowledged that the American economy is much more concentrated today, with numerous markets in which only a handful or fewer competitors still exist. The Chicago School has been proven wrong.

LP: As antitrust policy changed in the 1980s and 1990s, how were people impacted?

MG: The Chicago School influence changed antitrust for the worse in numerous ways. One of the most insidious has been the shifts in the evidentiary burden in antitrust cases on plaintiffs. This has led to weak enforcement and much greater market concentration.

Let me just give you a few examples of this phenomenon. You may have read that the big tech companies have made an unprecedented number of acquisitions in recent years. Microsoft, Google, Apple, Amazon, and Facebook each have made hundreds of purchases of other companies in their respective industries. The antitrust agencies have not investigated, let alone challenged, with minor exceptions, any of these mergers. The reason, in part, concerns Justice Lewis Powell, who, prior to accepting Nixon’s nomination to the Supreme Court, wrote the famous call-to-arms for American big business known as the “Powell memo.” Justice Powell made the evidentiary burden to a plaintiff challenging a potential competition merger unreachable in United States v. Marine Bancorporation in 1974.

Under the logic of Marine Bancorporation, if Google purchases a start-up that could siphon off its search business in the future, the DOJ or the FTC would have to prove that the target would have entered the general search market in the future (absent the merger) and that it would have deconcentrated the market. This is absurd! No plaintiff could prove this.

The Robinson-Patman Act was enacted in 1936 to outlaw price discrimination, preventing distributors from charging different prices to various retailers. Unfortunately, plaintiffs in Robinson-Patman cases also began to face an equally extravagant burden in the 1980s and 1990s. In the 1948 Supreme Court case of FTC v. Morton Salt, Co., a plaintiff that was a victim of price discrimination only had to show injury to itself. Since the 1980s, the federal courts have slowly increased the burden requiring proof of injury to competition as a whole, a standard that is virtually impossible to meet. In the circuits that have done this, there have been no successful plaintiffs I’m aware of.

LP: The New Brandeis movement has emerged to focus on strengthening antitrust policy, taking its cues from Justice Louis Brandeis, who served on the Supreme Court between 1916 and 1939. These insurgent scholars, activists, lawyers, and economists believe that the antitrust laws aren’t supposed to just deal with consumer welfare, but also to make sure we have competitive markets and see that large private entities don’t amass too much power, and, by doing so, threaten democracy. Do you agree with proposals by the New Brandeisian antitrust scholars like Tim Wu (author of “The Curse of Bigness: Antitrust in the New Gilded Age” and economic advisor to President Biden) and Columbia University legal scholar Lina Khan (recently nominated by Biden to the FTC)?

MG: As I understand it, the centerpiece of the New Brandeisian proposals (along with agency transparency) is to return to structural presumptions in antitrust similar to those that existed in the New Deal consensus. Many others have also made this suggestion, and I agree with this approach.

When mergers increase market concentration, we know that competition has been harmed even if to a small extent. Since this is the case, it makes sense to ask the merging parties to establish that the merger will provide benefits to the economy. The merging parties should be forced to document how the merger will increase product quality and lower price. In addition, the parties should explain how the merger will impact labor, how will it increase innovation, how will entry be impacted. Don’t ask the government to prove the negative. Merging parties have all the information for such an analysis, and they have access to an army of paid consultants. Similarly, if a monopolist engages in strategies such as below-cost pricing, refusals to deal, or other vertical restraints, the burden should be on the monopolist to show the challenged practice is pro-competitive. Vertical restraints should not be treated as per se legal.

I also agree with Lina Khan and others that the antitrust agencies have to be more forward-looking and preemptive. Amazon, for example, or any platform should not also be allowed to compete in a separate market on the platform. If Amazon runs the platform where most N95 masks are sold, it should not be in the N95 mask business on its own platform. This is a clear conflict of interest and no competitive benefit is likely to result from it down the road.

I would add that it’s also very important for progressive economists to aid the neoBrandeisians. While there are some progressive economists in the antitrust field, they are a tiny minority. For too long, progressive economists have been shying away from the whole subject of antitrust. There should be a call to arms by progressive economists to support the neoBrandeisian enterprise.

LP: Do you have any concerns with the New Brandeisian program? What kind of antitrust framework best serves the needs of the American people?

MG: I think what is lacking is a vision of where we want to see the economy go. In other words, what should the world look like under an optimal antitrust regime? In litigation we would call this the “but for” world.

Often, it sounds like the New Brandeisian goal is some version of perfect competition or competition with small firms. This is not where we need to go. We need instead to reconstruct and update the New Deal consensus, which worked so well for the economy and helped keep a political balance between big business and everyone else.

As economist William Lazonick puts it, we need firms as value-creating enterprises which engage in collective, cumulative learning with a dedicated, unionized employee skill base. We need to regulate finance like we once did. We also need to resurrect the developmental state dedicated to funding basic research and advanced infrastructure, and a political system that is not dominated by big business. Competition must play a critical role in this kind of regime as it did in the New Deal consensus.