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Saturday, March 17, 2012

11. Anti-Trust

The Concise Guide To Economics

by Jim Cox

11. Anti-Trust

The conventional theory of anti-trust laws (laws against monopolies) is that after the Civil War with the rise of large scale enterprises, businesses had power over consumers in being able to corner their markets.  Responding to a public need, the Congress passed the Sherman Anti-trust Act and the laws have done good ever since.  This conventional view is grossly mistaken. 
Actually, the origins of the anti-trust laws lie in politically influential businesses getting a national law passed to pre-empt state laws, to use the power of the state against their business rivals, and from a political vendetta by the bill's author against the head of a major firm.  Likewise, the laws have not served the consumer but have done the exact opposite, harming productive, cost and price-cutting businesses to the detriment of consumers.
Two famous anti-trust cases illustrate these points:  The 1911 Standard Oil Case divided the company into thirty-three separate organizations.  What was Standard Oil guilty of?  The judge decided that by integrating stages of the oil business--wells, pipelines, refineries, etc.--and by buying small unintegrated stages, Standard was preventing these separate businesses from competing with one another.  Nowhere was it found that Standard had raised prices (prices fell continuously), or had restricted output (output rose continuously)--the classical complaints against a monopoly.  Standard Oil had earned its position as the largest domestic oil producer by serving the needs of consumers and serving them very well. 
By the time the court case was settled, Standard had dropped from a 90% market share to a 60% market share because of the natural developments in the market itself.  Even assuming that the court case was originally necessary, it was made obsolete due to free competition from the Texas oil discoveries and by the move from kerosene to other petroleum products and from the advent of electricity.  There was nothing Standard Oil could do to stop these events--compare that to a government-authorized monopoly!
The Standard Oil Case set the precedent for a theory in anti-trust law known as the "rule of reason."  But, as D. T. Armentano has explained, how can this be reasonable when there is no reference to the facts?
The 1945 Alcoa Aluminum Case is equally absurd.  Alcoa had been the dominant primary aluminum producer for decades, having first begun production when aluminum was so rare and unknown that it was more valuable than gold!  Over the years Alcoa developed its facilities and methods enabling it to lower the price with its lowered costs and to expand its market.  As in the Standard Oil Case, there was no claim that Alcoa was charging high prices or restricting output.  So what did the judge find offensive?  The judge's verdict included this incredible paragraph:
It was not inevitable that it [Alcoa] should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.
Clearly, anti-trust theory had been turned literally on its head with good service to the consumer becoming a black mark in the courtroom.  Imagine if, instead, Alcoa had been an incompetently run organization, never gaining a significant share of the market, the judge (had he had occasion to rule on Alcoa) would have found Alcoa to be the very essence of a good citizen company, patted it on its head and sent it on its way to continue its blunders, all obviously to the detriment of consumers.  At the same time the judge was finding Alcoa guilty, the U. S. Congress was granting a commendation to Alcoa for doing such a fine job during the effort of WWII. 
Notice further that the market these companies was found guilty of monopolizing were the domestic oil market--overlooking the competition from imported oil--and the primary aluminum market--overlooking the competition from reprocessed aluminum.  In other words, the courts had to first artificially narrow the market in order to find these companies guilty!
Other equally absurd tales could be told of cases such as Brown Shoe, Von's Grocery, IBM and the shared monopoly in ready-to-eat breakfast cereals and can all be found in Armentano's Anatomy. Suffice it to say here that most other advanced countries do not have anti-trust laws and think it very strange indeed that the U.S. government would spend its time beating up on the businesses in its own jurisdiction.  And notice as well, that crippling these companies would benefit their rivals who were better politically connected--one of the real motives behind this law.
Now the vendetta story:  Senator Sherman had his heart set on being President of the United States and appeared destined for the Republican nomination in 1888.  His life's ambition was thwarted when Russell Alger--of the Diamond Match Company--threw his support to Benjamin Harrison, the eventual president.  In an effort to get Alger, Sherman sponsored the anti-trust law.  As President Harrison signed the bill into law he is reported to have said, "Ah, I see Sherman is getting back at his old friend Russell Alger!"  By the way, Diamond Match was never indicted and Sherman's true position was revealed soon afterwards as he sponsored a bill to levy a tax on imported consumer goods.  Thus the Sherman Act was a mere smokescreen for Congress to hide behind while it did its dirty business of sacrificing the consumer to political pull among businesses via the power of law.
With all of the anti-competitive, monopoly-creating regulations and laws, the only proper place for anti-trust indictments is against government agencies--a practice which Congress has managed to outlaw.

Concise Guide to Economics, The

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