Who's afraid of the AT&T merger?

American antitrust law is a relic of 19th century agrarian populism


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Michael Lind
September 6, 2011 9:40PM (UTC)

Recently, during a visit to a national park, I found that I could not use my cellphone to communicate with the friend who had accompanied me. A park ranger was kind enough to explain that calls in the park could not be made by those of us who pay my particular private wireless carrier, but phones using the services of other companies worked. I used the park’s land line to call my friend, thinking grimly: This doesn’t happen in countries with national phone monopolies.

Now we are told that the merger of AT&T and T-Mobile would create a monopoly. I am tempted to favor any monopoly that allows all phones to work everywhere in the U.S. But I don’t want to talk about the details of that proposed merger.  My subject is American antitrust law, which I have studied for years, in the hope of making sense of it. I finally gave up.

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Most Americans think that antitrust is among the founding principles of the American republic. And many people assume that there is widespread consensus among economists behind antitrust policy. Neither assumption is correct.

Antitrust law in its present form goes back not to the Founding but to the Sherman Antitrust Act of 1890. Like most pieces of bad legislation, the Sherman Act and later antitrust laws passed because they were vague enough to satisfy groups with entirely different conceptions of what it meant. The Sherman Act says: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." This sounds good, but what does it mean? To this day, nobody knows.

Even the name " antitrust" is weird. It comes from the term "trust" for the legal entities that late 19th century businesses in America created so they could operate in more than one state. Although trusts became obsolete when states like New Jersey and Delaware permitted the incorporation of national companies, this quaint term has lingered from the era of small-town bandstands, straw boaters and nickelodeons. The agrarian populists of the time viewed multi-state businesses as sinister conspiracies, and so " trust" came to mean any national corporation or bank.

The federal courts, which are charged with interpreting antitrust law, have failed to come up with any coherent doctrine for more than a century. Under the Sherman Antitrust Act, John D. Rockefeller’s Standard Oil Company was broken up, but U.S. Steel, which dominated about as much of its market, was left alone by the federal judiciary. In the 19th century, federal judges decided that the Sherman Act made unions illegal conspiracies in restraint of trade (it took decades for Congress to legislate otherwise). Nineteenth century federal judges ruled that cartels, which were perfectly legal in Britain, France, Germany and Japan, violated the Sherman Act, while mergers did not. So the U.S. in the early 1900s ended up with far more giant corporations than other industrial countries that permitted reasonable cooperation in prices and standards among smaller firms.

People whose understanding of the economy is limited to the simplicities of Econ 101 sometimes think that the purpose of antitrust is to promote innovation by promoting competition. But in the mid-20th century, the great economist Joseph Schumpeter argued that monopolies and oligopolies can be creative -- think of Bell Labs, Amazon’s Kindle and Apple’s iPhone. Thanks to productivity, efficient monopolies can sometimes lower prices more than perfect competition among many less-well-capitalized firms could. In the late 19th century, John D. Rockefeller came close to monopolizing the U.S. oil industry. Thanks to economies of scale in his refineries, oil prices dropped dramatically. Until World War II, Alcoa monopolized the U.S. aluminum industry. Thanks to economies of scale in its factories, aluminum prices plummeted.

Falling prices, in one industry after another, have resulted from technological productivity growth, not from market competition among many small producers. And in industries with increasing returns to scale, technological productivity growth is often made possible by concentration. If the antitrust ideology were correct, then efficiency would be promoted by smashing Boeing into pieces. Would the American aircraft industry be stronger if there were dozens or hundreds of tiny, undercapitalized aircraft manufacturers?

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According to antitrust theorists who believe that " excessive" market share in itself is a threat, there is supposed to be a balance between efficiency produced by scale and "harm to consumers." But this is doubly dubious. First, efficiency benefits consumers. Second, the alleged harm to consumers frequently is not identified with actual, identifiable acts of harm that violate the law. Harm is equated with mere bigness. A company with too great a market share might or might not do something, sometime, somewhere, that might or might not harm consumers.

Some observers of the AT&T/T-Mobile case have speculated that AT&T has downplayed the efficiency argument for the merger because greater productivity means doing more with fewer people -- an unpopular argument at a time of high unemployment. If so, that is further evidence of the irrationality of antitrust. Here’s a bold jobs plan: We could reduce unemployment, at the price of long-term growth, by replacing efficient, capital-intensive big companies with lots of small, labor-intensive, under-capitalized mom-and-pop operations.

All of this explains why American antitrust law has had surprisingly little support from economists of right or left. At the time the Sherman Act was passed, most conservative economists as well as most progressive economists welcomed the efficiencies made possible by large industrial corporations. In the name of the New Nationalism, Theodore Roosevelt distinguished among " good" and " bad" trusts and supported a failed bill that would have established executive branch regulation of national corporations -- something that makes far more sense than the attempt to regulate national companies by means of random lawsuits.

After World War II, liberal economists like John Kenneth Galbraith took for granted oligopolies and monopolies in the industrial sector and thought they should be balanced by government and unions, not smashed to smithereens. From the Progressive era onward, organized labor preferred to deal with large companies than lots of small ones. In the Reagan era, Robert Bork and other conservative experts argued that American antitrust policies made no sense. Supporters of an American industrial policy in the 1980s and 1990s argued that antitrust hampered U.S. competitiveness.

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With so many critics, who are the friends of antitrust law in America? Other than individual companies that believe they can gain an advantage from antitrust litigation, the friends of antitrust tend to be limited to antitrust lawyers, politicians and some populists and liberals.

For populists in the tradition of William Jennings Byran, antitrust was part of a trifecta of anti-bigness policies that included laws protecting small, unstable local banks and laws protecting mom-and-pop retailers from chain stores like the sinister Woolworth’s and the even more ominous Piggly Wiggly. The small-town special interests the agrarian populists sought to protect are mostly extinct, and their great-grandchildren shop in national chains and have accounts with national banks, innocent of the fact that, according to Great-Grandpa, they are betraying Jeffersonian democracy.

Liberal supporters of antitrust policy tend to find a hero in Louis D. Brandeis, the progressive lawyer and Supreme Court Justice who influenced the New Freedom, Woodrow Wilson’s alternative to Theodore Roosevelt’s corporation-friendly New Nationalism. Like the Virginian Wilson, the Kentucky-born Brandeis was a Southerner who denounced "the curse of bigness" and favored anti-chain store laws as well as antitrust prosecutions. His was one of the deciding votes cast by the Supreme Court against the constitutionality of Franklin Roosevelt’s National Industrial Recovery Act, which sought to allow trade associations to set minimum prices, in order to support universal minimum wages negotiated by companies with labor unions. Today the heirs of Brandeis are found among the sort of progressives who support local organic farming and denounce Wal-Mart as their predecessors blasted A&P in the 1920s and 1930s. (To the extent that Williams Jennings Bryan has contemporary heirs, they are found among fundamentalist Protestant creationists and the Tea Party followers of Sarah Palin and Michele Bachmann.)

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Progressives who favor both labor unions and breaking up big and efficient companies are confused. On the one hand, they want businesses to pay workers more than subsistence wages. On the other, they support a policy that aims to replace big businesses with smaller businesses that are less likely to pay good wages or provide benefits.

Antitrust progressives are also fooling themselves with their fantasy of a liberal-small producer alliance. In Jeffersonian mythology, the "people" are identified, not with the numerical majority of workers and consumers, but with the minority of local small bankers and small business owners (a fraction of the 10 percent of Americans who are self-employed). This small minority of the American population is not "the people," it is a collection of parochial local elites who often want to be protected from larger, more efficient national and global competitors.

What about limiting antitrust law to outlawing monopolies? That would be a bad idea, too. There are two kinds of legitimate monopolies. In utilities like water or electric grids, natural monopolies ought to be socialized or regulated with private ownership. In industries where superior technology or organization temporarily results in a few winners -- that is, most industries -- there is no need to intervene, as long as companies with new and better technology or organization can displace them. Have you mailed a Western Union telegram recently?

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American companies are allowed to become successful, but only to a point. If they become too successful, often they will be harassed by the government or destroyed. No other industrial country punishes its most successful firms like this.

The problems with American corporate capitalism -- overpaid CEOs, short-termism, corporate campaign contributions -- are real and serious, but government lawsuits to prevent mergers or to shatter successful firms do nothing to address them. As repealing the Sherman Act is unlikely, Congress and the courts should do the next best thing: limit antitrust litigation to punishing clear and narrowly defined acts of corporate predation after they have been committed.

From this logic follows the conclusion that mergers, like that of AT&T and T-Mobile, in general should be allowed to proceed. If, following the merger, the company were to exploit monopoly power by jacking up prices and gouging consumers, then it should be punished. But preventing mergers because companies might do something wrong, even though they haven’t yet, is too much like the corporate version of laws against "pre-crime" in the movie "Minority Report."

Mitt Romney to the contrary, corporations aren’t people. Nevertheless, they should be treated as innocent until proven guilty. Even big, bad "trusts." 

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Michael Lind

Michael Lind is the author of Land of Promise: An Economic History of the United States and co-founder of the New America Foundation.

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