Categories
Antitrust

When Kentucky Outlawed Profit, Holmes Overruled Kentucky

Section 198 of the Kentucky Constitution of 1891:

It shall be the duty of the General Assembly from time to time, as necessity may require, to enact such laws as may be necessary to prevent all trusts, pools, combinations or other organizations, from combining to depreciate below its real value any article, or to enhance the cost of any article above its real value.

The Constitution of the Commonwealth of Kentucky. Adopted September 28, 1891. Frankfort, Ky.: E. Polk Johnson, Public Printer and Binder. 1892.

Justice Oliver Wendell Holmes:

In our opinion it cannot stand.

International Harvester Co. of America v. Kentucky, 234 U.S. 216, 223 (1914).
Categories
Antitrust Regulation

Back to Atomic Laissez Faire

Lest we forget that deregulation was a project of the left, not just the right, here is Marxist legal historian Morton Horwitz in 1984:

Almost nothing in the antitrust debates supports what would soon become Theodore Roosevelt’s new conservative distinction between “good trusts” and “bad.” Roosevelt was operating under a newly emerging view that corporate concentration could be justified by economic efficiency-increasing returns to scale. Only corporations that achieved dominance through illicit means-financial manipulation or unfair competition-were “bad” trusts. By contrast, the old conservatives who passed the Sherman Act did not believe that the neoclassical economic law of diminishing returns had been repealed. [B]igness was per se bad. From their perspective, large-scale economic concentration was inherently illicit because, according to economic laws, there was no way corporations could legitimately achieve overwhelming economic dominance. Almost nothing in the Sherman Act debates suggests that economic concentration could be justified on efficiency grounds. That was for a later day.

. . .

The regulatory state, originally conceived as a means of checking corporate power, has gradually become discredited. In most cases deregulation now means that corporate power will simply be left unchecked. The original Progressive conception of the state as the means to our salvation must be fundamentally reconsidered. Without the sort of decentralized institutions that the old conservatives (and Progressives like Brandeis) supported, we seem destined to fluctuate between deregulation and its somewhat less overtly rapacious and more noble sounding sibling, regulation. Deregulation generally means unrestrained corporate control. Regulation frequently means more subtle, more disguised, and often more effective forms of corporate control.

Morton J. Horwitz, Progressive Legal Historiography, 63 Or. L. Rev. 679, 686 (1984).

Curiously, Horwitz’s position is today fast becoming the mainstream, bipartisan position on markets. Thus, to borrow Horwitz’s schema, we have come full circle, from the old conservative vision of antitrust-defended, laissez-faire markets of atomized sellers, to the new conservative/Progressive consensus on the importance of size, to the triumph of the Progressive accommodation with size in the form of New Deal rate regulation, to the triumph of the new conservative accommodation with size in the form of deregulation and Chicago School antitrust, to today’s gathering return to the old conservative rejection of size and embrace of an antitrust-defended atomized laissez faire. Ah me.

Categories
Antitrust

Bigness and Farce

The key point Brandeis missed, says McCraw, was that while in all fields tighter forms of combination were attempted, their potential success ultimately depended on the technological and managerial limitations and possibilities uniquely inherent in each particular industry. In some industries, large, tight combinations had tremendous potential; in others, they were bound to fail under the pressure of competition. Appalled by “bigness” and witnessing the failures among the trusts, Brandeis “too simply” inferred that bigness was inefficient as a general matter and failed to undertake a deeper, empirical investigation of the specific conditions
and developments in various particular industries. Positing a single
“bigness”-based explanatory model for problems throughout the economy as a whole led Brandeis into serious policy misjudgments because it “doomed to superficiality both his diagnosis and his prescription.”

James May, Antitrust Practice and Procedure In the Formative Era: The Constitutional and Conceptual Reach of State Antitrust Law, 1880-1918, 135 U. Pa. L. Rev. 495, 559 (1987).
Categories
Regulation

Begging Markets

In a world in which there were no government, firms would be forced by competition to do things that are bad for the world, that even the firms themselves realize are bad and do not really want to do, and our only hope for salvation would be that firms choose not to do those things, to suffer the punishment of the markets, to martyr themselves for society.

But of course there is a government, and government can put an end to whatever it wants. We do not need to rely on the good graces of the business world.

If you forget this — forget that there is a government — because you have worshiped so long at the altar of the free market, then you find yourself insisting on absurd things. Such as that CEOs ought, out of the goodness of their hearts, and with all the incentives pulling to the contrary, to start making socially just decisions:

Automating work is a choice, of course, one made harder by the demands of shareholders, but it is still a choice. And even if some degree of unemployment caused by automation is inevitable, these executives can choose how the gains from automation and A.I. are distributed, and whether to give the excess profits they reap as a result to workers, or hoard it for themselves and their shareholders.

Live by the market, despair by the market.

Categories
Antitrust Regulation

Flying 20/20

Frank Lorenzo, head of Texas International Airlines:

[I]f the Aviation Act of 1975[, which deregulated the airlines,] goes into effect, we will, over a period of years, end up with a couple of very large airlines. There will be many small airlines that will start up here and there, but they will never amount to a very significant amount of the transportation market. The smaller certificated airlines like Texas International[, which was acquired in 1982 by Continental Airlines, which itself merged with United in 2010,] will shortly become history. The operating and financial advantages will go to the large carriers with substantial resources, and to very small carriers that temporarily have lower labor costs, primarily because they are non-unionized.

Quoted in Richard H.K. Vietor, Contrived Competition: Regulation and Deregulation in America 54 (1994).

In 1978, when Congress deregulated the airline industry, there were 10 airlines that provided scheduled national and international service, and those 10 accounted for 90 percent of the domestic marketplace. Today, [in 2016,] there are four major airlines and a few smaller ones providing comparable service, and the four major airlines provide 80 percent of U.S. domestic flights.

Paula W. Render, The Airlines Industry, Concentration and Allegations of Collusion, Competition Policy International (June 14, 2016).
Categories
Antitrust Regulation

Slouching toward Reregulation

There is one solution to the monopoly problem that is conspicuously absent from Noah Smith’s account of monopoly power debates at this year’s ASSA.

Smith rightly concludes that breaking up big firms is not a perfect solution to the monopoly problem. (He thinks, incorrectly, in my view, that breakup is too hard; the real reason not to break up big firms is that they are often more efficient than small ones.) And he rightly gives a list of alternatives to breaking big firms up, including unions, minimum wage laws, putting workers on corporate boards, and imposing tougher labor standards on large firms than small. But he doesn’t seem to see where all of these alternatives point.

Where do minimum wage laws and applying tougher labor standards to large firms point?

To rate regulation, of course. To that approach to governing the market that once — in the decades following World War Two — stretched from securities brokerage to railroads to telephones to airlines.

In a regulated industry, a government administrative agency dictates prices and performance standards to the privately-owned firms that compete in the market. Applying tougher labor standards to firms with monopoly power, a proposal that Smith attributes to Nick Hanauer, is a shade of the old rate regulation, which was often imposed on monopolized industries, such as telephone service, to restrain the power of large firms.

Minimum wage laws are themselves a form of blunt price regulation, blunt because they are imposed on a one-off basis by legislatures instead of by expert administrative agencies with authority to revise the prices dynamically in response to changing circumstances. And both unionization and putting workers on corporate boards are even blunter forms of rate regulation, in that they hope that by increasing the bargaining power of workers, workers will succeed at negotiating the higher wages and better working conditions that a regulator would be empowered to impose by fiat.

True, most of Smith’s proposals are aimed at softening the consequences of labor market monopsony, whereas rate regulation was generally aimed at softening the consequences of consumer market monopoly. But there’s no reason why the Department of Labor couldn’t apply the tenets of rate regulation to labor markets.

Rate regulation is the most developed form of intervention in markets, one that encompasses all the other forms, but also goes beyond them, so it’s the natural choice for achieving just market-level distributions of wealth where unregulated markets fail to do so. A rate regulator can unionize an industry if the regulator wishes, just as the ICC effectively cartelized long-haul railroads to stabilize their prices: the regulator simply insists on approving only a wage tariff that is uniform for all workers, effectively forcing workers to bargain collectively with their employers. But a rate regulator can do more than that, regulating market entry to strike a balance between job security and competitiveness, insisting that workers offer certain bundles of skills, and even imposing workplace safety and benefits standards.

Once we start to believe that markets are failing, and that just breaking up big firms won’t achieve distributively fair market outcomes, as economists seem to be concluding, the door is open to market intervention, and at that point it makes sense to use the best tool for the job. The one-off ad hockery of minimum wages won’t do. Nor will strengthening unions — if you make them strong enough to really succeed, you make them strong enough to oppress investors and consumers. What you need is a politically accountable agency empowered to make markets work for all market participants.

That’s what rate regulation was, and could be again. Let’s stride to it, not slouch.

Categories
Antitrust

Antitrust’s Messy Breakup Fallacy

In a market economy in which dominance often rests on intellectual property, rather than on an installed base of industrial equipment, breaking up a large firm is as easy as ordering compulsory licensing, and letting markets do the hard work of pulling the rest of the firm apart. Breaking up large firms isn’t hard — it’s easy.

Noah Smith repeats the old fallacy that breaking up big firms, or reversing consummated mergers, is difficult, putting the divider in the position of creating two new companies from scratch. He writes:

It would be great if big companies could simply be divided into the competing rivals that existed before a merger took place. But once two competitors join, they tend to merge their sales departments, their engineering departments, their management structure and almost every other facet of their business. Antitrust regulators can’t easily order the merged company to split itself back into its constituent parts, because those parts no longer really exist.

Noah Smith, Economists Get Serious About the Harm From Monopolies, January 11, 2019.

Economists should know better than to make this mistake, because it involves ignoring markets. To break a firm up, all you have to do is to seize and divide up the asset that is the source of the firm’s advantage over competitors — force the licensing of key intellectual property to a new entity, for example — and the market will take care of the rest of the breakup.

The owners of the pieces of the divided asset will access markets on their own to assemble their own sales departments, engineering departments, management structures, supply chains, and so on — often, but not necessarily, by hiring away staff from the original firm that is the target of the breakup. Antitrust enforcers don’t have to worry about getting their hands dirty figuring out whether Bonnie in sales should go to the new firm, or Mark in accounting should stay with the old one. So long as antitrust enforcers divide the valuable asset properly, to ensure that the new companies are both financially viable, markets will take care of the rest. Bonnie may get a job offer from the new firm, and Mark may choose to stay put.

This messy breakup fallacy got a lot of air time twenty years ago, when a district court ordered the breakup of Microsoft. But Microsoft actually presents an excellent example of why breaking up should be easy to do in a market economy such as our own. The heart of Microsoft’s business wasn’t (and isn’t) its sales department, or even Microsoft Windows, but rather Microsoft Office, a program that had, and continues to have, a lock on virtually the entire word processing market thanks to a combination of consumer familiarity and the difficulty of exporting documents into competing systems. To break Microsoft up, all the court had to do back in 1999 — or, for that matter, would need to do today — was issue an order forcing Microsoft to release the full Microsoft Office source code and all future iterations. The court could then have just sat back and watched the company be devoured by a million startups, each offering a new flavor improving on the code.

Indeed, the easiest way to break up a big firm is to force licensing of its most valuable intellectual property assets. Because intellectual property doesn’t have a geographic location — ideas live in the ether — the problems of continued regional concentration that Smith also worries about don’t arise from licensing-driven breakups. And the beauty of it all is that in the Data Economy, intellectual property is the key to the dominance of most large firms. The age of behemoths deriving their power from vast installed bases of industrial equipment — the Standard Oils and the AT&T local loops — is gone. And so too any messiness associated with industrial deconcentration.

It’s time to recognize antitrust’s messy breakup fallacy for what it is.

Categories
Annals of American Decline Regulation World

Markets and American Decline

Operating from headquarters in a hilltop villa in the capital city, protected by government soldiers, a businessman with strong ties to his own government back home, a belief in his own manifest destiny, a desire to go down in history as a bringer of industrial development, and deep experience in completing hydropower and mining projects, submits a bid to the country’s leaders to build them a new oil refinery. The bid is backed by a loan guarantee from one of his country’s largest banks, provided as part of an initiative by his country’s government to win the friendship of other nations by providing development support.

Lacking an office in the country in which the refinery is to be built, a former mid-level government official with no experience building anything tries to cobble together a bid of her own from shared office space in her own country. She finds an investor — not at home but in a third country — gets an expression of interest from some executives from a firm in her own country with refinery construction experience, and places a bid in which she promises to secure the rest of the funding for the project by selling shares in the venture on capital markets. When ministers visit her country as part of consideration of her bid, they are shocked to be shown around shared office space, and insist that she line up a more secure source of financing. She begs her government to sign on, but the most she gets is a letter from a government lender saying that it would considering lending a fraction of the project cost.

Once upon a time, this would have been a tale about American power. The first person would be a TR, say, supremely confident about his place in history, carrying out a Marshall Plan (if you will forgive the anachronism) reflecting the ambition of the U.S. government to use aid to secure the allegiance of the world. The second person would be some luckless underfunded competitor operating out of a backward country with a weak state lacking the vision to promote its businesses and interests abroad.

But of course the first person in this story is Chinese and the second is American. As the article in today’s Times strongly suggests, the American won the bidding only because Uganda’s leader hopes to encourage American competition, and thereby to improve the terms he gets from the Chinese in the future. Indeed, the American project may well fall apart, as GE — the firm with expertise in refinery building that had shown interest in the bid — has started to exit that line of business.

How did we get here? The answer is our decades-long obsession with market magic. There has been much talk in some circles about the “fissured workplace,” the converting of many jobs into “independent contractor” positions that allow employers to treat their employees as temp staff with no job security and few benefits. Firms no longer have employees, but instead simply tap contractor markets, buying labor hours when they are needed and not when they are not, much the way you make a run to the supermarket for lemons when you need them and not when you don’t, instead of tending your own lemon tree.

Well, more than just labor markets have fissured. Everything has fissured, as our obsession with markets has spread to every corner of the economy since the 1970s. Just look at how the American bid for the refinery came about. Not at the instigation of our government, despite its recognition that China’s dominance in African business is putting us at a great strategic disadvantage, but because a mid-level foreign policy official, thrown out of work by the exit of the Obama Administration, saw a market opportunity. She then went into a set of different markets in order to try to cobble together a bid. She rented shared office space, tapping the fissured commercial real estate market, in which businesses no longer own their own space, let alone build their own custom spaces, as they once did. She also had no funding of her own, but promised to tap the fissured funding markets by selling shares in the project. And she had no experience building refineries, so she also promised to tap the fissured project market, potentially by bringing GE into the project. Markets, market, markets.

All these markets are supposed to make our economy and nation stronger, by ensuring that everything is allocated to the people who need the things the most. Workers can be repurposed via the market from one job to another at a moment’s notice, office space can be saved for the most important projects, cash can flow to the most important projects, and so on.

But what market excess really does is expose our economy and nation, to risk. The trouble with markets is that they are risky. At the end of the day the Ugandans got a bid that was worth little more than the paper it was written on. It was in effect a commitment from an amateur to use acceptance of the bid by the Ugandans to convince investors to invest, refinery builders to build, and so on. What the Chinese offered, by contrast, was a government-backed commitment to fund construction of the refinery by an experienced firm. The parts of the Chinese offer were so well integrated — so unfissured — that the Chinese even insisted on importing 60% of the labor and materials from China to complete the project. That’s right, the Chinese would bring in their own laborers to complete the work.

No wonder the American bid was at a severe disadvantage. If you were taking bids to have your floors redone, would you go with the man off the street with no experience, no operations, and no money — even if he offered the lower price — or the experienced flooring operation that’s ready to get to work as soon as you sign on the dotted line?

When you do business with integrated operations, instead of markets, you carry less risk, because integration reduces risk. It makes sure that the money is there, the expertise is there, the workers are there. You may still bear the risk of non-completion, but that risk is lower. And when the state gets behind its businesses in these deals, as the Chinese government has via its Belt and Road initiative, risk is reduced further. The Chinese drive a hard bargain, using the infrastructure they build to secure repayment of the loans, but they can do that because they have something credible to sell.

If the story of a businessperson trying to get along in an international deal — one that forwards the President’s own policy of going head to head with China — without government support, without expertise, without financing, without even an office, sounds the story of a failed state, that’s because a fissured economy — an economy in which everything, at every level in the supply chain, has been turned into a market — is a failed state. It’s a country that can have no vision or unity of purpose because its government is paralyzed by the need to respect market boundaries, unable to direct the economy according to any vision, and in which every individual and private firm is paralyzed too, at the mercy of markets in everything that they do. Therein lies the state of nature.

Of course it was not always this way. Until market dogma took over the country in the 1970s, American industry looked a lot more like Chinese industry does today. Long-term commitment to workers and suppliers was the norm. Indeed, in America’s many regulated industries, the government required firms to provide packages of services, instead of fissuring the services into the a la carte menus that have proliferated today. The government promoted international development as a strategic goal, most famously in the Marshall Plan.

And, perhaps most importantly, America had a taste for greatness. It would not have thought that “the threat posed by the Belt and Road Initiative to American interests is debatable.”

Categories
Antitrust Regulation

Competition as Tax Policy

Once upon a time, Chicago to New York was a cheap rail fare, whereas the much shorter trip from Chicago to Peoria was expensive, because in a dense rail network there were lots of ways to get from Chicago to New York, and therefore lots of competition on that route, whereas there were only a few ways to get from Chicago to Peoria, and therefore much less competition. The big city people who rode Chicago to New York had more money than the small city people who rode Peoria to Chicago, but the big city people paid lower fares, because the big city people benefited from competition.

Competition gave the big city folk alternatives, and that strengthened their bargaining power vis a vis the railroads. The lack of competition denied the small city folk alternatives, and that reduced their bargaining power vis a vis the railroads. But the changing of alternatives is taxation.

Suppose instead that rail competition were somehow equal in both markets, but the government were to tax small city riders by a certain amount and redistribute that amount of money to the big city riders. The tax would effectively drive up the fare paid by the small city riders and drive down the fare paid by the big city riders, achieving the same result as did the unequal levels of competition on the big and small city routes. Inequality in competition is tantamount to inequality in pricing, which is tantamount to tax and transfer.

Put another way, the presence of competition on the big city route and absence on the small city route caused the railroads to collect a large share of their revenues from small city riders. Small city riders subsidized big city riders, in a sense. The railroad acted as a kind of taxing authority, redistributing from small city riders to big city riders, but the railroad’s tax policy was determined by the competitive environment, not the railroad itself, by the presence of competition on the big city route and the absence of competition on the small city route.

Flip the competitive configuration — make the small city route less competitive than the big city route (perhaps by allowing cartelization of service providers on the big city route) — and now the big city riders will contribute a larger share of the railroad’s revenues. Now the big city riders might be said to pay the subsidy and the railroad to be taxing the big city riders for the benefit of the small city riders.

Depending on how antitrust divides up markets and goes about promoting competition in them — as I discuss briefly in another post — the competitive terrain created by antitrust represents a tax system and a specific set of distributive results.

From this perspective, if your goal is to redistribute wealth, you want more competition in some markets — the ones inhabited by the poor — and less competition in other markets — the ones inhabited by the rich. That’s just the kind of policy that progressives advocate: antitrust for big firms, cartelization for workers and small businesses.

Note that this is not an argument about the ability of competition to force a particular distribution of surplus within a market, between buyers and sellers. This is about the ability of antitrust to alter relative outcomes in different markets by altering relative levels of competition. This is about how antitrust makes price discrimination possible, and how that price discrimination redistributes, even when the different prices charged are charged by different firms in different markets.

Categories
Miscellany

A Tale of the Tail

Legal forms that were well adapted to a world in which wealth was zero sum, and borrowing against an estate could serve no purpose other than to carry out a slow transfer of it to others, were poorly adapted to a world in which wealth could be created, and borrowing against an estate could fund investment that would improve its productivity:

In Hitel Széchenyi argued that Hungary’s agriculture remained unproductive because of its reliance on the unpaid labor of serfs. If they wanted to raise production, landowners should instead employ wage labor on their estates. But in order to afford large numbers of wage laborers or the luxury of experimenting with new technologies, Hungary would also have to rid itself of the legal tradition of entailed estates. Entail prevented the estates of the magnates—the highest aristocrats—from being partitioned or sold. It required that land be passed down undivided according to specif‌ic inheritance rules. An entailed estate could not be used as collateral for raising mortgage loans, nor could any of it be sold off to raise funds. These laws made it impossible to use land as a resource for raising the money needed to invest in new technologies or to develop a system that paid wages to free peasant laborers. Széchenyi pointed out that while nobles owned more than two thirds of the arable land in Hungary, a surprisingly high percentage of that land remained uncultivated. And this in a time where 920,000 peasant families in Hungary were registered as “landless.” If nobles could sell or mortgage their lands for credit, they could invest in new technologies of production, and they could pay wages to peasant workers. If they could raise credit, nobles could also fund new manufactures that could employ landless peasants. Széchenyi criticized many other aspects of the feudal system in Hungary, especially the nobles’ continued immunity to taxation, the inability of most peasants to own land, the restrictions that the guild system placed on the free development of manufactures, and the lack of legal equality for the vast majority of the population.

Pieter M. Judson, The Habsburg Empire: A New History 111 (2016).