In January 2001, Time Warner merged with America Online (AOL). Valued at $350 billion, it was the largest merger in American history.
Critics, including lawmakers and consumer groups, warned that the deal would stifle competition and perhaps even signal the demise of Internet freedom. Senator Mike DeWine (R-Ohio), chairman of the Senate Judiciary Committee’s antitrust subcommittee, said the merger raised “a whole host of competition and public policy issues.”
“Is this merger the effective beginning of the end of the Internet as an effective counterweight to traditional media outlets?” he asked.
These fears turned out to be for naught. The bursting of the dot-com bubble; the rise of broadband, which decimated AOL’s business model; and infighting among the various Time Warner divisions all contributed to a speedy collapse of the merger. In 2010, Time Warner CEO Jeff Bewkes called the merger “the biggest mistake in corporate history.” Fortune dubbed it “the worst merger of all time.”
Today, Time Warner is seeking to merge with another large communications company, AT&T, and once again we are being treated to tales of impending doom if the merger is allowed to proceed. This time, the opposition is coming from both a Republican president and an increasingly aggressive antitrust faction within the Democratic Party.
The Justice Department is suing to prevent the merger, arguing that the proposed media conglomerate “would leave millions of television viewers paying more and would slow innovations like video streaming,” reported the New York Times. In a November speech, Makan Delrahim, assistant attorney general for the department’s antitrust division, took a hard line on enforcing antitrust law, a “stance” that “surprised the corporate sector, which had expected easier deal reviews under the Trump administration,” the paper noted.
Senator Elizabeth Warren (D-Mass.), who is widely expected to seek her party’s presidential nomination in 2020, also spoke out against the merger, saying she supports the lawsuit to block it. Warren went further, however, claiming antitrust enforcement has been far too lax in recent decades, with many agreements between regulators and corporations being “epic failures.”
“We need to demand a new breed of antitrust enforcers,” she declared, “enforcers who will turn down papier-mâché settlement agreements and actually take cases to court.”
“Senator Warren’s theme that antitrust can be used to protect small businesses, entrepreneurs, innovators, workers and just about everyone else from the ‘rich and powerful,’” averred the National Law Review, “shows that increasing antitrust enforcement has become a key party line for the upcoming midterm elections.”
Certainly antitrust sentiment is on the rise among hard-left Democrats, who have formed the Congressional Antitrust Caucus. The caucus is calling for stricter enforcement of antitrust law and, moreover, a refocusing of that enforcement on broader concerns such as mergers’ expected effects on jobs, income inequality, and various other progressive causes — a phenomenon former Federal Trade Commission (FTC) official Joshua Wright has dubbed “hipster antitrust.”
Members of the hipster antitrust movement — they prefer to be known as the New Brandeis school, a reference to former Supreme Court Justice Louis Brandeis, a foe of big corporations — believe there was once a golden age of antitrust enforcement in which the U.S. government’s expert regulators had the wisdom to break up corporate conglomerates that were engaging in unfair, anticompetitive practices that harmed not just consumers but society as well. This “golden age,” they claim, ended in the late 1970s when the government, under the influence of the Chicago school of economics, adopted the “consumer welfare” standard for antitrust enforcement, which narrowly focused on whether a proposed merger was expected to result in lower prices or other favorable conditions for consumers. This change, in the hipsters’ opinion, opened up the floodgates for mergers of all types, no matter how harmful.
In truth, economist Thomas DiLorenzo maintained in a 1991 paper, “There never was a golden era of antitrust.” Antitrust laws were crafted for political reasons, and they have always been enforced selectively — and frequently illogically. They do not exist to protect either consumers or other businesses from genuinely criminal or fraudulent practices but to give politicians and disgruntled competitors a weapon to wield against their opponents.
The first stirrings of antitrust sentiment in the United States occurred in the late 19th century, when small farmers and businesses began clamoring for protection from large corporations, arguing that these businesses were creating a “dangerous concentration of wealth” among entrepreneurs such as John D. Rockefeller and Cornelius Vanderbilt.
“There was no ‘dangerous concentration of wealth,’” DiLorenzo found, noting that the division of national income between labor and capital remained constant between 1840 and 1900, “but many supporters of antitrust legislation found that their own income had fallen (or not increased rapidly enough). The push for antitrust legislation was an attempt to use the powers of the government to improve their economic status.”
In 1890, these interest groups succeeded in getting Congress to pass the Sherman Antitrust Act, a law that was ostensibly aimed at protecting consumers from monopolies but in reality served as a fig leaf for a huge protective-tariff hike.
Ohio Senator John Sherman and his allies claimed that trusts were conspiring to restrict output, thereby increasing prices. According to DiLorenzo, that contention was patently false. In the decade prior to the passage of the Sherman Act, real Gross National Product increased by roughly 24 percent, while output in the allegedly monopolized industries increased by an average of 175 percent. The consumer price index, meanwhile, fell seven percent, with prices in these same “monopolized” industries falling even faster. The Congressional Record shows that lawmakers recognized the trusts’ price-cutting propensities but opposed them nonetheless because they put less-efficient competitors (i.e., those lobbying for antitrust laws) out of business.
This article appears in the March 5, 2018, issue of The New American. To download the issue and continue reading this story, or to subscribe, click here.
Three months after the Sherman Act became law, Sherman, a Republican, sponsored legislation that was popularly known as the “Campaign Contributors’ Tariff Bill” because it sharply raised tariffs on imported products that competed with those manufactured by large corporations that had bankrolled various Republican politicians. By making competing foreign goods cost more, the bill enabled domestic manufacturers to keep their own prices high without having to fear a loss of business — the very opposite of the stated aim of the Sherman Act. Such brazen hypocrisy led the New York Times to reverse its pro-Sherman Act stance, explaining, “That so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this … law relating to the tariff.”
The remaining major federal antitrust laws were passed in the early 20th century. The Clayton Act (1914) prohibits predatory price discrimination, whereby a company undercuts its competitors’ prices until it has driven them out of business and then raises prices afterward — a practice with so little evidence of its existence that even the Supreme Court acknowledged (in 1986’s Matsushita v. Zenith Radio Corp.) it is “rarely tried, and even more rarely successful.” The Federal Trade Commission Act (1914) bans “unfair competition,” which Pepperdine University economics professor Gary Galles labeled “a masterpiece of vagueness, given that it is hard to think up how an offer willingly accepted by consumers could be unfair to them, absent force or fraud.” And the Robinson-Patman Act (1936) restricts price reductions and quantity discounts, which is to say it interferes with freely chosen exchanges of private property.
The most famous antitrust case brought by the U.S. government was against Rockefeller’s Standard Oil Company in 1911. “The popular explanation of this case is that Standard Oil monopolized the oil industry, destroyed rivals through the use of predatory price-cutting, raised prices to consumers, and was punished by the Supreme Court for these proven transgressions,” recounted economist Dominick Armentano. “Nice story but totally false.”
Standard Oil never had a monopoly on the oil industry. At the time of the Supreme Court’s decision, it had at least 137 competitors, and its market share had been declining for years. It achieved dominance in the late 1800s because of continual efficiency improvements that reduced its refining costs by over 90 percent during the course of three decades — savings that were passed along to consumers, who saw the price of kerosene, at that time the industry’s main product, plummet 80 percent between 1869 and 1911. No court ever found the company guilty of predatory pricing. Despite the lack of evidence of the charges against Standard Oil, the Supreme Court broke up the company “because it discerned some vague ‘intent’ to monopolize through Standard’s many mergers, an ‘intent’ that just as clearly never succeeded in producing any monopoly,” wrote Armentano.
In 1939, a federal judge dismissed nearly 150 antitrust charges against Alcoa, finding that the company had succeeded by innovating rapidly, expanding output, and cutting prices, not by any underhanded practices. Six years later, however, an appellate court overturned that decision on the grounds that, in Armentano’s words, “expanding outputs and lowering prices illegally excluded rivals from the opportunity to compete and thereby violated antitrust law.”
The American Can Company (1949) and United Shoe Machinery Corporation (1954) were found guilty of violating antitrust law by performing so well and offering such generous terms to their customers that those customers remained loyal to them for years. American Can was — believe it or not — ordered to raise its prices. United Shoe was saddled with restrictions that were supposed to reduce its competitive advantage; when they failed, the government appealed to the Supreme Court, which divested and ultimately destroyed the company.
More recently, Microsoft was found guilty of monopolization in 2001 because it had integrated its web browser, Internet Explorer, into its Windows 98 operating system. The government’s argument was that Microsoft had a monopoly on the operating-system market and then used that monopoly to try to eliminate competing web browsers, specifically Netscape. However, prosecutors used a definition of the relevant market that excluded most of Microsoft’s competitors. At the same time, Netscape was the dominant player in the browser business, so Microsoft was merely trying to make its own browser more competitive with the “monopoly” browser. Fortunately, the company largely prevailed on appeal, but only after a decade of litigation and many millions of dollars in legal costs. (Just 17 years later, the whole dispute seems rather archaic. According to NetMarketShare.com, there are now at least 38 browsers, most if not all available at no cost, and Google’s Chrome is by far the most used, with Firefox and Internet Explorer running neck-and-neck for a distant second place.)
Given the sordid history of antitrust, why are today’s “progressives” pushing for its revival and expansion?
For one thing, many of them are simply ignorant of history. A recent Yale Law Journal article stumping for hipster-antitrust enforcement against Amazon repeated the old predatory-pricing canard against Standard Oil. One would never know from reading the piece that subsequent research, including an exhaustive 1958 study by economist John McGee, has blown that myth out of the water.
For another, as Edmond Bradley pointed out in a Ludwig von Mises Institute column, “The fear of industrial concentration is the last refuge of socialist theory.” The Competitive Enterprise Institute’s Frank Bednarz wrote that “irrespective of direct consumer prices, hipsters believe industrial concentration undermines income equality, workers’ wages, and even democracy itself.” Hipsters are unhappy with the relative sanity and stability the consumer-welfare standard has brought to antitrust enforcement, Microsoft and similar cases notwithstanding. They want the government to have vastly more power, under even vaguer standards, to prevent mergers.
Senator Amy Klobuchar (D-Minn.) has introduced legislation that, according to Bloomberg Law, “would require companies to prove their mega-deals are good for competition before they can get government approval.” That is, companies would be presumed guilty until they proved their innocence, a nearly impossible hurdle to overcome. “We absolutely must increase the level of federal antitrust enforcement in this country,” said Klobuchar, ranking Democrat on the antitrust subcommittee. She also said she is working on additional antitrust legislation with subcommittee chairman Mike Lee (R-Utah), and she wants to hold hearings on the proposed merger of the Walt Disney Company and 21st Century Fox.
Representative Keith Ellison (D-Minn.), deputy chairman of the Democratic National Committee and member of the Congressional Antitrust Caucus, has introduced a bill that would require the FTC and the Justice Department “to conduct annual retrospective studies of how mergers impact prices, jobs, wages, and local economies,” reported New York magazine. Companies that refuse to comply with requests for relevant data would be fined $40,654 a day until they submit.
Broadening the government’s power to prevent mergers, especially to achieve “social justice,” could be very dangerous indeed. During a December hearing, Tad Lipsky, former head of the FTC’s competition bureau, told the antitrust subcommittee that adding hipster concerns to antitrust law “threatens to drag antitrust into a political enforcement arena where accountability will be impossible.” Bednarz called it “a gift to would-be tyrants” because it gives the executive branch “much more arbitrary power.”
Hipsters seem to recognize that the existing arbitrary power in the hands of a president they don’t like can be a bad thing. While they agree with the Trump administration’s attempt to block the Time Warner-AT&T merger, more than a few have raised concerns that the attempt is rooted in petty political differences, namely President Donald Trump’s vocal disdain for the “fake news” of Time Warner subsidiary CNN, rather than genuine concern over media concentration.
“But,” argued Bednarz, “a theory of antitrust law that depends on virtuous executives is a bad theory.” That is, in fact, true of all antitrust law, not just the hipsters’ variation on it. All of it is based on the belief that some group of experts possesses the wisdom to determine which combinations of industry pose a threat and to calculate the precise way in which such alleged monopolies should be broken up to prevent them from ever endangering the public again.
The fact is, however, that antitrust law has from its inception been a political tool. “Trustbusting” President Theodore Roosevelt, for instance, conveniently busted only those trusts (such as Standard Oil) not aligned with banker J.P. Morgan, a close Roosevelt ally, while shielding Morgan-controlled trusts (such as U.S. Steel) from prosecution. How else could a system designed by politicians and peopled by political appointees operate?
The Phantom Menace
But isn’t the threat of monopoly dangerous enough to warrant laws against it, even if they, as with all other laws, are imperfectly enforced?
In a free market, companies rarely, if ever, attain monopolies. When they do, it is usually because they have invented new products or services and thus have no direct competitors. For example, Apple’s 2007 introduction of the iPhone gave the company a near monopoly on the smartphone market at the time, enabling it to charge high prices for its product; Apple turned a $326 profit on every second-generation iPhone sold.
This huge profit margin, however, is precisely what makes free-market monopolies exceedingly short-lived, because it attracts competitors. Within four years, Apple’s monopoly on the smartphone market was shattered by the introduction of Android-based smartphones such as the Samsung Galaxy. Today there is a wide variety of smartphones that do much more than the original iPhone yet cost almost nothing; sometimes they are even given away. Had the government imposed price controls or otherwise hampered Apple’s ability to make “obscene” profits on the original iPhones, other companies would have had much less incentive to challenge the iPhone’s dominance, and Apple would have had little reason to invest in improvements to its own product.
Any doubts that market dominance is fleeting can be dispelled by a look at the Fortune 500 over time. The American Enterprise Institute’s Mark Perry recently compared Fortune 500 firms in 1955 to those in 2017. Perry found that only 60 companies were on both lists, meaning that 88 percent of the top firms in 1955 “have either gone bankrupt, merged with (or were acquired by) another firm, or they still exist but have fallen from the top Fortune 500 companies (ranked by total revenues).” Those remaining on the list have generally changed positions on it, and many of the companies on the 2017 list — Walmart, Apple, and Amazon among them — didn’t even exist in 1955. Perry also noted that a company’s average tenure on the S&P 500 continues to shrink, from 33 years in 1965 to 20 years in 1990 to a forecast 14 years by 2026. “At the current churn rate,” he wrote, “about half of today’s S&P 500 firms will be replaced over the next 10 years.”
Mainstream economists fret about the dangers of monopoly because they have been taught that the ideal economy is one of so-called perfect competition in which there are so many sellers and buyers who all possess perfect knowledge of past, present, and future market conditions that none of them can have a significant effect on the market price of any good or service. In this ideal world, there are no profits or losses.
Of course, as economist Richard Ebeling, an adherent of the Austrian school of economics, pointed out in a column for the Future of Freedom Foundation, “such a theory assumes away all the reality of what we normally think of as competition: an active rivalry among sellers each of whom has limited and imperfect knowledge, and is attempting to discover ways and means to make new, better and less expensive goods to offer to the consuming public, precisely as the method by which profits may be made and losses avoided…. Actual market conditions are then evaluated and judged by a standard or benchmark … that almost by necessity condemns any real competitive situation at most moments in time as being ‘anti-competitive’ and therefore potentially ‘monopolistic.’”
In fact, under the perfect-competition theory, anyone who “is able to influence the market price at which he sells his product, and make his product different from that offered by any other seller in a given market,” is considered a “monopolist,” Ebeling explained. What’s more, mainstream economists assume that anyone able to influence the market price of his product at any given moment in time will always be able to do so, which is why such “monopolies” must, in their opinion, be tamed by the government. But as we have seen, in a dynamic, real-world economy, market conditions are constantly in flux, and one seller’s “monopolistic” profits are likely to be siphoned off by competitors in relatively short order.
If free-market “monopolies” do not present much of a danger to the public, then what types of monopolies do? “When looked at dispassionately, factually, and historically,” penned Ebeling, “monopoly has almost always represented a problem in society only when created, protected or imposed by government intervention.”
AT&T had a virtual monopoly on U.S. telephone service for much of the 20th century, thanks in part to a 1913 antitrust settlement that enabled it to consolidate its control over much of the telephone system by purchasing local telephone companies in key areas of the country. (See how well antitrust works?) Collusion with politicians led to the one-year nationalization of the telephone system during World War I, during which time AT&T captured the regulatory body overseeing it, eventually regulating its competitors out of existence. State governments got into the act, too, variously restricting or prohibiting competition in both local phone service and the installation of telephone lines.
For the next six decades, Americans were at AT&T’s mercy. All telephones were owned by AT&T, which charged customers a monthly rental fee and additional fees if the phone needed servicing. Long-distance rates were steep, and urban customers were forced to pay higher rates to subsidize rural ones. With no fear of competition, the company had little reason to improve its service, and it was notoriously unresponsive to customers. No wonder Lily Tomlin got so much comic mileage out of her character Ernestine the telephone operator, who told one angry customer, “We’re the phone company. We don’t care; we don’t have to.”
In 1974, the federal government finally decided to do something about AT&T’s stranglehold on the U.S. telecommunications system. Naturally, it chose to file an antitrust suit rather than attack the regulations and sweetheart deals that had created the monopoly in the first place; that, after all, would have been an admission of guilt on Uncle Sam’s part. Nevertheless, eight years later, when the case was finally settled, it proved to be a boon to consumers. Competitors such as MCI and Sprint rushed into the long-distance market, telephone rates plummeted while service improved, and Americans put AT&T out of the phone-manufacturing business. Today there is no single telephone company, and cellphones and Internet telephony have freed Americans even further from a monopoly that never had to be.
Government regulation of airlines from the 1930s to the 1970s restricted entry into the industry, creating an oligopoly, and kept fares largely out of reach of the average American. Deregulation, on the other hand, brought fares down and made flying so common that a 2003 survey by the Bureau of Transportation Statistics found that 82 percent of Americans had flown commercially.
Monopoly privileges also help explain why the U.S. healthcare system is so out of whack compared to what it could be in a genuinely free market. “The American Medical Association (AMA) has had a government-granted monopoly on the healthcare system for over 100 years,” Kel Kelly wrote in a Mises Institute article. “It has intentionally restricted the number of doctors allowed to practice medicine so as to raise physician incomes artificially.” To that end, the AMA got states to restrict the number of medical schools while guaranteeing that only AMA members would sit on state licensing boards. In addition, the AMA has a government-granted monopoly on the Medicare billing codes, for which physicians are collectively forced to pay the group a tidy $100 million a year.
Government-granted monopolies on cable television and broadband service are one reason some people are up in arms over the Time Warner-AT&T merger. Because local governments have given Time Warner nearly exclusive rights to provide cable and broadband service in certain areas, some fear that the combination of Time Warner and AT&T will restrict people’s access to content the conglomerate doesn’t produce while hiking prices it charges other providers for content it does produce. Such fears “seem misplaced in an age when anyone with a smartphone can be a content creator, and when new entrants like Netflix, Amazon, Hulu, and Disney are disrupting content distribution,” argued Bednarz. But even if these concerns have a genuine basis, the obvious solution is to do away with the existing monopoly privileges, not to use antitrust law to try to rectify problems created by other government interventions.
Indeed, crusaders for more government intervention to prevent monopolies should consider the fact that government policies frequently encourage consolidation and inhibit competition. “There are tremendous regulatory forces in play today that encourage the Instagram sell-out over the Snapchat IPO [Initial Public Offering],” National Review’s Iain Murray observed. Chief among them, he contended, is the 2002 Sarbanes-Oxley law, which has turned IPOs into “extremely onerous undertakings,” forcing entrepreneurs to seek funding elsewhere, yet regulators have put the kibosh on new, innovative equity funding methods.
“The result,” Murray maintained, “is that financial regulation aimed at stopping ‘too big to fail’ actually created a problem of ‘too small to succeed.’ Larger firms may have become entrenched because regulation makes it too difficult to lend to startups and skews the incentives when it comes to a successful startup growing or selling out to a larger firm.”
From Bad to Worse to Better
Existing antitrust law is bad enough. It interferes with voluntary transactions between private actors; ignores sound, real-world economics in favor of pie-in-the-sky models; destroys successful big businesses; prevents smaller competitors from growing; and, to top it all off, is unconstitutional.
Enforcing existing antitrust law more vigorously and increasing its scope to encompass “social justice” would be even worse. It would introduce an even greater degree of politicization and arbitrariness into antitrust enforcement than already obtains, creating significant uncertainty around a wide array of business decisions, with the perfectly predictable result of slower economic growth and a lower standard of living for most Americans. It would increase the power of government at the expense of Americans’ God-given liberties. And it would only encourage corporations to seek closer, more corrupt alliances with government officials in an effort to protect themselves and get their own piece of the pie.
Rather than growing the government, would-be trustbusters ought to heed the trustworthy words of former Congressman Ron Paul: “Those concerned about excessive corporate power should join supporters of the free market in repudiating the regulations, taxes, and subsidies that benefit politically powerful businesses.”
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