Archives For antitrust populism

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)


The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

A panelist brought up an interesting tongue-in-cheek observation about the rising populist antitrust movement at a Heritage antitrust event this week. To the extent that the new populist antitrust movement is broadly concerned about effects on labor and wage depression, then, in principle, it should also be friendly to cartels. Although counterintuitive, employees have long supported and benefited from cartels, because cartels generally afford both job security and higher wages than competitive firms. And, of course, labor itself has long sought the protection of cartels – in the form of unions – to secure the same benefits.   

For instance, in the days before widespread foreign competition in domestic auto markets, native unionized workers of the big three producers enjoyed a relatively higher wage for relatively less output. Competition from abroad changed the economic landscape for both producers and workers with the end result being a reduction in union power and relatively lower overall wages for workers. The union model — a labor cartel — can guarantee higher wages to those workers.

The same story can be seen on other industries, as well, from telecommunications to service workers to public sector employees. Generally, market power on the labor demand side (employers) tends to facilitate market power on the labor supply side: firms with market power — with supracompetitive profits — can afford to pay more for labor and often are willing to do so in order to secure political support (and also to make it more expensive for potential competitors to hire skilled employees). Labor is a substantial cost for firms in competitive markets, however, so firms without market power are always looking to economize on labor (that is, have low wages, as few employees as needed, and to substitute capital for labor wherever efficient to do so).

Therefore, if broad labor effects should be a prime concern of antitrust, perhaps enforcers should use antitrust laws to encourage cartel formation when it might increase wages, regardless of the effects on productivity, prices, and other efficiencies that may arise (or perhaps, as a possible trump card to hold against traditional efficiencies justifications).

No one will make a serious case for promoting cartels (although Former FTC Chairman Pertshuk sounded similar notes in the late 70s), but the comment makes a deeper point about ongoing efforts to undermine the consumer welfare standard. Fundamental contradictions exist in antitrust rhetoric that is unmoored from economic analysis. Professor Hovenkamp highlighted this in a recent paper as well:

The coherence problem [in antitrust populism] shows up in goals that are unmeasurable and fundamentally inconsistent, although with their contradictions rarely exposed. Among the most problematic contradictions is the one between small business protection and consumer welfare. In a nutshell, consumers benefit from low prices, high output and high quality and variety of products and services. But when a firm or a technology is able to offer these things they invariably injure rivals, typically smaller or dedicated to older technologies, who are unable to match them. Although movement antitrust rhetoric is often opaque about specifics, its general effect is invariably to encourage higher prices or reduced output or innovation, mainly for the protection of small business. Indeed, that has been a predominant feature of movement antitrust ever since the Sherman Act was passed, and it is a prominent feature of movement antitrust today. Indeed, some spokespersons for movement antitrust write as if low prices are the evil that antitrust law should be combatting.

To be fair, even with careful economic analysis, it is not always perfectly clear how to resolve the tensions between antitrust and other policy preferences.  For instance, Jonathan Adler described the collision between antitrust and environmental protection in cases where collusion might lead to better environmental outcomes. But even in cases like that, he noted it was essentially a free-rider problem and, as with intrabrand price agreements where consumer goodwill was a “commons” that had to be suitably maintained against possible free-riding retailers, what might be an antitrust violation in one context was not necessarily a violation in a second context.  

Moreover, when the purpose of apparently “collusive” conduct is to actually ensure long term, sustainable production of a good or service (like fish), the behavior may not actually be anticompetitive. Thus, antitrust remains a plausible means of evaluating economic activity strictly on its own terms (and any alteration to the doctrine itself might actually be to prefer rule of reason analysis over per se analysis when examining these sorts of mitigating circumstances).

And before contorting antitrust into a policy cure-all, it is important to remember that the consumer welfare standard evolved out of sometimes good (price fixing bans) and sometimes questionable (prohibitions on output contracts) doctrines that were subject to legal trial and error. This was an evolution that was triggered by “increasing economic sophistication” and as “the enforcement agencies and courts [began] reaching for new ways in which to weigh competing and conflicting claims.”

The vector of that evolution was toward the use of  antitrust as a reliable, testable, and clear set of legal principles that are ultimately subject to economic analysis. When the populists ask us, for instance, to return to a time when judges could “prevent the conversion of concentrated economic power into concentrated political power” via antitrust law, they are asking for much more than just adding a new gloss to existing doctrine. They are asking for us to unlearn all of the lessons of the twentieth century that ultimately led toward the maturation of antitrust law.

It’s perfectly reasonable to care about political corruption, worker welfare, and income inequality. It’s not perfectly reasonable to try to shoehorn goals based on these political concerns into a body of legal doctrine that evolved a set of tools wholly inappropriate for achieving those ends.