Antitrust and Institutionalism: A Critique of Traditional Chicago School Conceptualisations of Antitrust Law
In its simplest form, antitrust law refers to legislation that is designed to prevent the formation and spread of monopolies. At the core of such a law is the will to protect small businesses from being disadvantaged by unfair tactics, as well as to provide consumers with better price choices through fostering competition. In this entry, I shall debate the various ideologies that have underpinned changes in antitrust legislation, with an emphasis on the branches that have emerged from the famed Chicago School, and I shall place these in the context of the Reagan Administration, which is an era that many scholars consider to be a watershed period for antitrust policy. Additionally, I shall argue that the as-of-yet infant Neo-Chicago School could serve as an apposite framework for understanding the modernisation of antitrust law and as an apt guide for future antitrust proceedings. As such, in comparison with my previous entries, this one will admittedly be more ideologically discursive, with a particular focus on the principles of antitrust laws, and the socio-philosophical theories that have underpinned its changes.
American antitrust law has a very long and rich history that dates all the way back to the 19th Century. In the United States, the first ever piece of antitrust legislation occurred as a result of an event whereby large companies joined together to form trusts by signing trust agreements. Representatives of giants appointed trustees who were empowered to set prices and maximise profit by eliminating competition. The inevitable effect of this was a monopolisation of the market, in which newly-formed monopolies would employ below-cost pricing and other unfair techniques to remove all competition. Consequently, they were able to sell their products at the highest prices that they could feasibly command. This process of cartelisation thus resulted in a few large monopolies acting as masters of a large portion of the consumer market.
Therefore, in response to this hostile takeover of the market, the Sherman Antitrust Act was passed in 1890, which became the first ever form of antitrust legislation in America. The act essentially forbade the signing of all trust agreements and any actions which would result in a constriction of trade and thus reduction in competition. Moreover, in 1914, the Clayton Act amended the Shearman Act and tightened antitrust rules by banning discrimination in pricing between customers, and made it illegal for one company to purchase the stock of another company for the sole purpose of creating a monopoly. In the meantime, the Federal Trade Commission (FTC) had been established to serve as the central source of business monitoring and the enforcement of antitrust law. This has been paralleled in the United Kingdom by the creation of the Office of Fair Trading, which is a non-ministerial government department established in 1973 in order to enforce antitrust regulation in the UK. It serves to review proposed mergers, enforce laws under the Competition Act, as well as to surveil consumer credit practices through licensing regulations, and makes recommendations to the legislature regarding compliance issues involving European Community regulations.
Now, American scholars, particularly those who advocate laissez-faire economics and deregulation, have argued that antitrust legislation may impede progress in its pursuit of protecting small-town American values. This is perhaps best encapsulated in the occurrences in which antitrust and intellectual property law conflict, namely when antitrust regulations limit the exercise of rights conferred by intellectual property law. For example, in its comments in 2004, the now-defunct Sun Microsystems Inc. recommended that the Federal Trade Commission ought to consider the creation of standards-development groups in which to discuss matters relating to standards-setting so that antitrust legislation should necessitate standards-setting organisations to adopt procedures and intellectual property rights policies that require full disclosure early in the standard development process.
The aforementioned point of discussion suggests that antitrust could potentially stagnate business operations by entering into conflict with other legal sectors. A similar point can be made with regard to technological modernisation. Due to the rapid changes in contemporary technology, and the ease brought on by automation by which producers can produce market products, many companies with a dominant position on the consumer market may be considered "transient monopolies". Consequently, this technological paradigm shift has sparked debate about antitrust law and policy, especially as a result of the increased relevance of networks, such as banking and digital bases. For example, because of network effects, both consumers and businesses may benefit greatly from the abundance of consumers that utilise the same provider or platform. Therefore, once one company begins to appear as thought it would emerge as the likely winner, the market can quickly "tip" in its favour, as buyers in search of the advantages of network effects would go with the likely winner. This would subsequently create a scenario where there has been reached a monopolisation of a certain sector of the consumer market, however it would differ greatly from the 'trust' scenario that pieces of legislation such as the Sherman Act and the Clayton Act had striven to counter, because monopolisation would not be driven by the financial greed of the producers but rather by the preferences of the consumers.
A viable solution to the above dilemma is provided by Dennis Carlton, an industrial economist at the University of Chicago, which asserts that one ought to identify where the antitrust laws have worked well and also find evidence of where antitrust laws have worked poorly. Carlton's contention is thus not that antitrust laws are in dire need of 'modernisation', as perhaps the above discussion indicated. Rather, where cases involving cartelisation are incorrectly adjudicated, that is because of human error and not due to any "systematic flaws in antitrust doctrine". To a certain extent, I concur with Mr. Carlton's proposition. Simply because the market is being redefined by technology, it does not mean that the entire system of antitrust enforcement needs redefinition and reorganisation. However, to say that only human error has ever been responsible for erroneous antitrust-related verdicts is somewhat reductive, if not a little naive. Systems are designed and constructed by people of similar convictions, be they moral, political, or socio-economic. Therefore, if a system is deemed faulty, then one ought to look at its foundations and determine why they may not be able to accommodate for ongoing changes. Mr. Carlton's notion of "human error" directly implies that antitrust failings, whenever they occur, are the result of a few 'bad apples', yet a more macro consideration of the organisation of systems and the convictions underpinning such systems could provide a more holistic comprehension of systems and negative changes. In order to understand this, antitrust policy during the Reagan administration warrants consideration.
Without a shadow of doubt, Ronald Reagan's presidency has drastically changed the fundamental principles and enforcement of antitrust laws. Reagan entered office with the overt goal of eliminating or significantly reducing government regulations in most or all areas of commercial affairs. The President targeted virtually every government-owned regulatory agency, including those affiliated with health and the environment, worker safety, natural resources, consumer deception, and antitrust.
Both the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission have been reformatted by the appointment of laissez-faire lawyer-economist William F. Baxter as the Head of the Antitrust Division and the equally laissez-faire economist, Dr. James Miller III, as Chairman of the Federal Trade Commission. Both appointees were self-labelled followers of the Chicago School of Economics, which holds the fundamental tenet that the guiding principle of antitrust legislation should be the pursuit of economic allocative efficiency. What this entails is the view that all business behaviour should be evaluated in terms of its contribution to economic efficiency as predicted by economic models of competition. For example, in the case of mergers and acquisitions, Reaganist antitrust policy assumes that since the actions of businessmen always reflect their pursuit of greater efficiency, mergers rarely pose a public policy problem. Such a view went hand-in-hand with Reagan's campaign rhetoric in which he opposed efforts to hinder the conglomerate merger wave as "arbitrary, unnecessary and economically unsound". As a consequence, both the Antitrust Division and the Federal Trade Commission had devised new merger guidelines that have widely permitted conglomerate and vertical mergers. To put this into context, under such guidelines practically every merger ever found detrimental to competition and illegal by the Supreme Court since 1960, would not have been judged the same during Reagan's tenure as President of the United States. Of similar relevance are Reagan's court appointments, which have generally reflected his conservative views; as with his agency appointments, Reagan appointed several Chicago School judges to the appellate courts, his most controversial being that of Professor Richard Posner.. Soon after his appointment, Posner's detachment from reality quickly came to the fore in an antitrust decision in which he contended that a plaintiff ought not to be granted discovery until an antitrust violation had been proven yet he did not provide an explanation of how exactly a plaintiff could prove their case without prior discovery. Consequently, one may argue that Reagan's Chicago School-basis for his economic policies served as a convenient way to legitimate his antitrust and broader economic policies. Given the prestige of the Chicago School in fields such as economics, sociology, criminology and social policy, Reagan's move to appoint thinkers associated with the University of Chicago bestowed credibility upon his conservative and controversial policies, particularly his campaign to devoid American business of government oversight.
Yet the Chicago School's dismissal of institutionalism warrants a closer look at its doctrine, and the various branches that have emerged from it, the most novel being the Neo-Chicago School. According to Crane (2012), as opposed to the traditional Chicago School, Neo-Chicagoan antitrust analysis is not centred around the University of Chicago, nor is it necessarily associated with leading thinkers in legal academia. Equally, because of its recency, there is no fixed set of academic work that could be attributed to it. Henceforth, attempting to define the Neo-Chicago School necessitates more than identifying a group of similarly-oriented academics drawing upon a common intellectual framework. According to Crane, a definition of the Neo-Chicago School requires its placement within the intellectual history of antitrust. For example, the 1970s and 1980s marked a significant point in the decline in a belief in interventionism. The Chicago School had triumphed over and trumped the Harvard School of Thought by scolding its assertions about the relationship between structure and agency and explaining that many practices previously understood as competitive had been completely innocent. This ideological shift is best exemplified by the previously-discussed new guidelines that the Antitrust Division and the Federal Trade Commission had adopted during Reagan's presidency, under which many of the antitrust cases declared illegal by the Supreme Court during the 1960s would not have even been challenged during Reagan's administration of the United States.
Paleo-Chicago thinkers, which is what Richard Posner might more accurately be associated with, resemble more closely the traditional Chicago School, and have argued that the Antitrust Division is assumed to have been a "laughingstock of middle-aged lawyers at bar association meetings", while making similar scathing remarks about the Federal Trade Commission, calling it an alternately "sleepy backwater of incompetence or a protector of inefficient producers at the expense of consumers" (Crane, 2012). This ridicule and disdain of antitrust enforcement agencies is implicit in Reagan's campaign rhetoric, and especially the view that government intervention is economically unsound. That said, due to current political climates stemming from the moral panic that has emerged from the global financial crisis, antitrust will persist and therefore Neo-Chicagoans cannot afford to vehemently oppose antitrust on an ideological level in a similar vein to Paleo-Chicagoans, for in order to remain relevant, any school that seeks to provide conceptual tools need not only speak of what antitrust should not do, but also of what it should do and how it should do it.
A further issue that needs be pointed out in relation to Reaganist antitrust is that the argument for deregulation in the contemporary era can be seen as unrealistic in light of technological, and subsequently economic developments. For example, where Neo-Chicagoans may possess an advantage over the Paleo-Chicagoans and Reaganists is in a neo-institutionalism that will consider the institutional realities of contemporary antitrust enforcement, including the prevalence of private litigation and its spillover effects on all sectors of antitrust enforcement. Consequently, the executive branch of government ought to be allowed greater discretion through which to formulate antitrust policy and settle competition issues. This is necessary because in the last few decades, the Federal Trade Commission has been relatively relaxed in its antitrust actions, while private enforcers have shaped most of the theories of liability, such as predatory overbidding and predatory pricing. However, increasing the influence of the FTC would bear negative consequences for the executive branch because it would mean building up the independent agency at the expense of the executive agency, namely the Antitrust Division. It is thus very difficult to claim that there is only one right path, because more often than not, when such a claim is made, it usually leads to extreme actions, such as the widespread Reaganist deregulation.
In conclusion, interventionism is not the 'big bad wolf' that poses a large threat to business. The real threat rather, is basing policies of potentially deep impact on outdated and thus now-unrealistic philosophical doctrines. Antitrust policy is necessary in order to foment fair competition and fair choices to consumers, yet this is somewhat of a sweeping statement because the network effects mentioned earlier could potentially legitimate monopolisation, for it is the consumers' preferences that drive "transient monopolisation", and not the monetary greed inherent in cartelisation.
American antitrust law has a very long and rich history that dates all the way back to the 19th Century. In the United States, the first ever piece of antitrust legislation occurred as a result of an event whereby large companies joined together to form trusts by signing trust agreements. Representatives of giants appointed trustees who were empowered to set prices and maximise profit by eliminating competition. The inevitable effect of this was a monopolisation of the market, in which newly-formed monopolies would employ below-cost pricing and other unfair techniques to remove all competition. Consequently, they were able to sell their products at the highest prices that they could feasibly command. This process of cartelisation thus resulted in a few large monopolies acting as masters of a large portion of the consumer market.
Therefore, in response to this hostile takeover of the market, the Sherman Antitrust Act was passed in 1890, which became the first ever form of antitrust legislation in America. The act essentially forbade the signing of all trust agreements and any actions which would result in a constriction of trade and thus reduction in competition. Moreover, in 1914, the Clayton Act amended the Shearman Act and tightened antitrust rules by banning discrimination in pricing between customers, and made it illegal for one company to purchase the stock of another company for the sole purpose of creating a monopoly. In the meantime, the Federal Trade Commission (FTC) had been established to serve as the central source of business monitoring and the enforcement of antitrust law. This has been paralleled in the United Kingdom by the creation of the Office of Fair Trading, which is a non-ministerial government department established in 1973 in order to enforce antitrust regulation in the UK. It serves to review proposed mergers, enforce laws under the Competition Act, as well as to surveil consumer credit practices through licensing regulations, and makes recommendations to the legislature regarding compliance issues involving European Community regulations.
Now, American scholars, particularly those who advocate laissez-faire economics and deregulation, have argued that antitrust legislation may impede progress in its pursuit of protecting small-town American values. This is perhaps best encapsulated in the occurrences in which antitrust and intellectual property law conflict, namely when antitrust regulations limit the exercise of rights conferred by intellectual property law. For example, in its comments in 2004, the now-defunct Sun Microsystems Inc. recommended that the Federal Trade Commission ought to consider the creation of standards-development groups in which to discuss matters relating to standards-setting so that antitrust legislation should necessitate standards-setting organisations to adopt procedures and intellectual property rights policies that require full disclosure early in the standard development process.
A viable solution to the above dilemma is provided by Dennis Carlton, an industrial economist at the University of Chicago, which asserts that one ought to identify where the antitrust laws have worked well and also find evidence of where antitrust laws have worked poorly. Carlton's contention is thus not that antitrust laws are in dire need of 'modernisation', as perhaps the above discussion indicated. Rather, where cases involving cartelisation are incorrectly adjudicated, that is because of human error and not due to any "systematic flaws in antitrust doctrine". To a certain extent, I concur with Mr. Carlton's proposition. Simply because the market is being redefined by technology, it does not mean that the entire system of antitrust enforcement needs redefinition and reorganisation. However, to say that only human error has ever been responsible for erroneous antitrust-related verdicts is somewhat reductive, if not a little naive. Systems are designed and constructed by people of similar convictions, be they moral, political, or socio-economic. Therefore, if a system is deemed faulty, then one ought to look at its foundations and determine why they may not be able to accommodate for ongoing changes. Mr. Carlton's notion of "human error" directly implies that antitrust failings, whenever they occur, are the result of a few 'bad apples', yet a more macro consideration of the organisation of systems and the convictions underpinning such systems could provide a more holistic comprehension of systems and negative changes. In order to understand this, antitrust policy during the Reagan administration warrants consideration.
Both the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission have been reformatted by the appointment of laissez-faire lawyer-economist William F. Baxter as the Head of the Antitrust Division and the equally laissez-faire economist, Dr. James Miller III, as Chairman of the Federal Trade Commission. Both appointees were self-labelled followers of the Chicago School of Economics, which holds the fundamental tenet that the guiding principle of antitrust legislation should be the pursuit of economic allocative efficiency. What this entails is the view that all business behaviour should be evaluated in terms of its contribution to economic efficiency as predicted by economic models of competition. For example, in the case of mergers and acquisitions, Reaganist antitrust policy assumes that since the actions of businessmen always reflect their pursuit of greater efficiency, mergers rarely pose a public policy problem. Such a view went hand-in-hand with Reagan's campaign rhetoric in which he opposed efforts to hinder the conglomerate merger wave as "arbitrary, unnecessary and economically unsound". As a consequence, both the Antitrust Division and the Federal Trade Commission had devised new merger guidelines that have widely permitted conglomerate and vertical mergers. To put this into context, under such guidelines practically every merger ever found detrimental to competition and illegal by the Supreme Court since 1960, would not have been judged the same during Reagan's tenure as President of the United States. Of similar relevance are Reagan's court appointments, which have generally reflected his conservative views; as with his agency appointments, Reagan appointed several Chicago School judges to the appellate courts, his most controversial being that of Professor Richard Posner.. Soon after his appointment, Posner's detachment from reality quickly came to the fore in an antitrust decision in which he contended that a plaintiff ought not to be granted discovery until an antitrust violation had been proven yet he did not provide an explanation of how exactly a plaintiff could prove their case without prior discovery. Consequently, one may argue that Reagan's Chicago School-basis for his economic policies served as a convenient way to legitimate his antitrust and broader economic policies. Given the prestige of the Chicago School in fields such as economics, sociology, criminology and social policy, Reagan's move to appoint thinkers associated with the University of Chicago bestowed credibility upon his conservative and controversial policies, particularly his campaign to devoid American business of government oversight.
Yet the Chicago School's dismissal of institutionalism warrants a closer look at its doctrine, and the various branches that have emerged from it, the most novel being the Neo-Chicago School. According to Crane (2012), as opposed to the traditional Chicago School, Neo-Chicagoan antitrust analysis is not centred around the University of Chicago, nor is it necessarily associated with leading thinkers in legal academia. Equally, because of its recency, there is no fixed set of academic work that could be attributed to it. Henceforth, attempting to define the Neo-Chicago School necessitates more than identifying a group of similarly-oriented academics drawing upon a common intellectual framework. According to Crane, a definition of the Neo-Chicago School requires its placement within the intellectual history of antitrust. For example, the 1970s and 1980s marked a significant point in the decline in a belief in interventionism. The Chicago School had triumphed over and trumped the Harvard School of Thought by scolding its assertions about the relationship between structure and agency and explaining that many practices previously understood as competitive had been completely innocent. This ideological shift is best exemplified by the previously-discussed new guidelines that the Antitrust Division and the Federal Trade Commission had adopted during Reagan's presidency, under which many of the antitrust cases declared illegal by the Supreme Court during the 1960s would not have even been challenged during Reagan's administration of the United States.
Paleo-Chicago thinkers, which is what Richard Posner might more accurately be associated with, resemble more closely the traditional Chicago School, and have argued that the Antitrust Division is assumed to have been a "laughingstock of middle-aged lawyers at bar association meetings", while making similar scathing remarks about the Federal Trade Commission, calling it an alternately "sleepy backwater of incompetence or a protector of inefficient producers at the expense of consumers" (Crane, 2012). This ridicule and disdain of antitrust enforcement agencies is implicit in Reagan's campaign rhetoric, and especially the view that government intervention is economically unsound. That said, due to current political climates stemming from the moral panic that has emerged from the global financial crisis, antitrust will persist and therefore Neo-Chicagoans cannot afford to vehemently oppose antitrust on an ideological level in a similar vein to Paleo-Chicagoans, for in order to remain relevant, any school that seeks to provide conceptual tools need not only speak of what antitrust should not do, but also of what it should do and how it should do it.
A further issue that needs be pointed out in relation to Reaganist antitrust is that the argument for deregulation in the contemporary era can be seen as unrealistic in light of technological, and subsequently economic developments. For example, where Neo-Chicagoans may possess an advantage over the Paleo-Chicagoans and Reaganists is in a neo-institutionalism that will consider the institutional realities of contemporary antitrust enforcement, including the prevalence of private litigation and its spillover effects on all sectors of antitrust enforcement. Consequently, the executive branch of government ought to be allowed greater discretion through which to formulate antitrust policy and settle competition issues. This is necessary because in the last few decades, the Federal Trade Commission has been relatively relaxed in its antitrust actions, while private enforcers have shaped most of the theories of liability, such as predatory overbidding and predatory pricing. However, increasing the influence of the FTC would bear negative consequences for the executive branch because it would mean building up the independent agency at the expense of the executive agency, namely the Antitrust Division. It is thus very difficult to claim that there is only one right path, because more often than not, when such a claim is made, it usually leads to extreme actions, such as the widespread Reaganist deregulation.
In conclusion, interventionism is not the 'big bad wolf' that poses a large threat to business. The real threat rather, is basing policies of potentially deep impact on outdated and thus now-unrealistic philosophical doctrines. Antitrust policy is necessary in order to foment fair competition and fair choices to consumers, yet this is somewhat of a sweeping statement because the network effects mentioned earlier could potentially legitimate monopolisation, for it is the consumers' preferences that drive "transient monopolisation", and not the monetary greed inherent in cartelisation.
Thank you for a good commentary of a complicated subject. Several months ago, I was at one of those Q&A sessions with our congressman, and brought up the issue of how the Free Market, of which I have always been a great fan, has nevertheless failed us in the area of health care. (Specifically, when doctors live in palaces and drive $100,000 cars while average working class folks can afford neither health care nor health insurance, we live in a sick society.)
ReplyDeleteRep Webster pointed out that the health insurance industry is not subject to anti-trust laws.
I would be interested in seeing your comment, if any.
Thank you for your comment. I admit that I am not too well versed in the American healthcare system but from what I have read and heard, it is extortionate and as a result, I am not surprised that annual mortality surpasses 2,500,000 deaths. In order to not elongate the article too much, I briefly mentioned Reagan's hostility to ubiquitous antitrust enforcement, which did involve an attack on healthcare-related antitrust. I feel that the health insurance industry should come under antitrust scrutiny, just like any industrial sector. Perhaps one would argue that healthcare is so expensive and cannot be free for all due to the advanced technology that is employed in all sorts of treatments, which ironically, does not always bring fruitful results. Therefore, in order to compensate for such costs, the healthcare seeker would need to pay a lot of money. I personally am not in favour of such an argument. I feel that the American government's spending is very disproportionate, with too much going into the military and not enough subsidies given to important social sectors such as healthcare and education. In the case of the latter, if we are to follow this line of argument, it is no surprise that elite university fees are sordidly expensive. To me it feels like the undergraduate student would be paying more for a high-quality service rather than the benefit of education, if you get what I mean. What I would be interested in hearing from you, as an American (I am from Romania but I study in England), is your opinion in Ronald Reagan, and whether you think he deserves all the praise that he has received ever since the end of his tenure as President. Once again, thank you for taking the time to read my article.
Delete