Economic theory is essential to antitrust law. It is economic analysis that constrains antitrust law and harnesses it so that it is used to protect consumers rather than competitors. And the relationship between economics and antitrust is responsible for the successful evolution of antitrust from its economically incoherent origins to its present state. In my view, which I’ve expressed in greater detail elsewhere, the fundamental challenge for antitrust is one that is created by having “too many theories” without methodological commitments from regulators and courts on how to select between them. The proliferation of economic models that came along with the rise of Post-Chicago economics and integration of game theory into industrial organization has led to a state of affairs where a regulator or court has a broad spectrum of models to choose from when analyzing an antitrust issue.
This may have been a positive development for economic science. This is not the place to have that debate. But for law and economics the proliferation of theoretical models without attention paid to empirical testing of models, combined with the above-mentioned “model selection” issue allow regulators and courts significant degrees of freedom to select any model they like — why not the one that matches their ideological prior beliefs or policy preferences? Taken to the extreme, this model selection problem threatens to strip the disciplining force that economics has placed on antitrust law that was a key part of the successful evolution of that body of law over the last fifty years. The stakes involved in appropriately specifying the link between economic theory and antitrust law, and understanding the role of empirical evidence in that relationship, are high.
The importance of the issue is why I have criticized both what I view to be a trend toward reducing the role of economics and economists in antitrust, as well as those who turn the issue of model selection into an ideological debate rather than one driven by economic theory and evidence. Readers of TOTM will know that I have, on occasion, criticized Commissioner Rosch on these grounds. Well — apparently he was reading (see n.3) and has devoted some time in a recent speech to “dispelling a misconception about how I view economics and economists, attributable I fear to not making my views clear.”
I applaud Commissioner Rosch for recognizing the confusion that some of his views on economics may have caused and further applaud him for attempting to set them straight in a public forum. Transparency is useful in contexts such as these precisely because it allows these views to be strained and tested by those who disagree (and also because it puts the antitrust and business communities on notice). Here is what the Commissioner had to say about his critics:
More specifically, critics – overwhelmingly Chicago School apologists – have suggested that I am anti-economics and anti-economist and, indeed, that I doubt that economics should play a role in antitrust law enforcement. Those are not my views. My views are as follows….
If one follows n.3 in that speech, despite the use of the plural, the reference is apparently one that is exclusive to me and this series of posts on Commissioner Rosch’s treatment of economics, economists, and the role of economic theory in antitrust:
Commissioner Rosch on the Smaller Role of Economists in Antitrust Litigation
Inter-Agency Scuffling Over Section 2: What Role for Economists and Economics at the FTC and DOJ?
Commissioner Rosch v. Economics Again
And here are a few that the Commissioner didn’t cite for the sake of completeness:
No Ovation for the FTCs Latest Enforcement Theory
Is the Chicago School Really Dead? How Do You Know?
“One Thing is Clear to Me: The orthodox and unvarnished Chicago School of economic theory is on life support, if not dead”
In a later speech on the “Redemption of a Republican,” in which the punchline is that the “confessions of sin” from Posner and George Osborne in the UK redeem Rosch’s views and might even save us from clinging to “bankrupt” economics, the Commissioner refers to his “orthodox Chicago School critics” without identification or citation, writing that:
The orthodox Chicago School economist community has been especially dumbfounded. Some economists have denounced my remarks questioning the use of economic formulae as reflecting a general bias against economists. With specific reference to my January remarks, they have both asserted, on the one hand, that the current economic crisis says nothing about microeconomics as opposed to macroeconomics and at the same time have denied that any Chicago School economist has ever asserted that markets are perfect or self-correcting or that businesspeople are rational. They have also asserted that most of the decent post-Chicago School economics thinking has come from orthodox Chicago School economists. After all of this criticism, I was starting to question whether I really was a loyal Republican.
I suspect I’m also the dumbfounded denouncer — though I refer readers to this post to see what I actually said (see also here) because it differs substantially from Rosch’s characterization (if indeed it purports to summarize my positions). Suffice it so say that one can read very closely and there is no claim there about what Chicago School economists have said or not said about businesspeople being rational.
As for the “assertion” that most of the decent post-Chicago thinking has come from orthodox Chicago School economists — again, this is simply untrue and misleading. Instead, the claim is that folks like Aaron Director anticipated many of the economic insights of the raising rivals’ cost models, that Chicagoans such as Ben Klein and Tom Hazlett are responsible for some of the leading empirical examples of Post-Chicago phenomena, and that Dennis Carlton (Chicago GSB) extended some of the theoretical work (for more on this, see here). Don’t, however, take it from a Chicago School apologist. Instead, here it is straight from the leading thinker of the Post-Chicago economic movement: “it is important to recognize that [the Post-Chicago] approach has its root in the economic analysis of Chicago School commentators.” See Steven C. Salop, Economic Analysis of Exclusionary Vertical Conduct: Where Chicago Has Overshot the Mark, in OVERSHOT THE MARK, at 144. Similarly, try to talk about coordinated effects without invoking Stigler (1968).
This is why the prefix “orthodox” in front of Chicago School is misleading — though perhaps an effective rhetorical device. Chicagoans have done important empirical work on market failures and helped to develop and test Post-Chicago models. By what meaningful definition does this constitute “orthodoxy”? Nevermind the persistent use of the term orthodox to imply a static, monolithic body of economic knowledge. This term by colloquial implication glosses over important differences between the work and approaches of, for example, Alchian, Klein and Oliver Williamson and in understanding how asset specifity and opportunism influence firm behavior, or between Klein, Telser and Marvel on vertical restraints, or between Demsetz and Coase on the theory of the firm. The label both misleads, errs as a matter of economic history, and favors ideology and shorthand labels over substance. None of this, of course, is new to political rhetoric. To some, to invoke the term Chicago School is not to reference a broad intellectual movement but to utilize a heuristic to describe a reflexively anti-interventionist position that typically involves (in the eyes of the evoker) irrational disdain for government regulation. While current financial times make it somewhat fashionable for journalists and casual observers to toss around without regard to accuracy or evidence caricatured versions of entire schools of economic thought (to which serious scholars have devoted decades of intellectual energy), antitrust experts have generally carefully avoided such style of commentary in favor of careful analysis of competing theories and evidence.
One more quick — but related — about misrepresenting views. Rosch describes George Stigler’s work on oligopoly theory as follows:
Nobel Prize winning economist George Stigler’s 1964 article “A Theory of Oligopoly” in which he explained that it was improper to assume that firms in an oligopolistic market would find a way to agree to raise prices above competitive levels.
This is wrong. Stigler said it was wrong to assume that firms would inevitably collude. Rather, he proposed a framework for analyzing the factors that would affect their ability to do so. That framework provides the basis for much of our modern antitrust understanding on collusion and coordinated effects. It is simply wrong to insinuate that Stigler thought it was impossible for oligopolists to collude successfully.
Ultimately, I’m far more concerned with the misrepresentation of ideas, theories and evidence than Commissioner Rosch’s description of me as a “Chicago apologist.” The label Commissioner Rosch assigns to me or others does not resolve the substantive merits of the “model selection” problem or the fundamental question here of whether Rosch’s ideas on the relationship between economics and antitrust are sensible. It’s true that I’ve written as a positive matter that the Roberts Court’s antitrust jurisprudence is more Chicago than Harvard. I’ve criticized those who have caricatured and Chicago School scholars and ideas and avoided taking on the substantive merits of those economic ideas in favor of ideological labels. I’ve also argued that the appropriate way to settle intellectual battles in antitrust between competing models is with reference to the empirical evidence — and that attempts to explain the persistence of Chicago School economics in antitrust jurisprudence without rejecting the hypothesis that it is the body of economic theory that is most consistent with the available empirical evidence is unlikely to lead to good antitrust policy.
In short, an analysis of the existing theory and evidence that suggests that the Chicago School’s contributions to antitrust economics hold up quite well relative to competing theories when the contest is run with reference to empirical data rather than who shouts the loudest is not an apology as I understand the word. I therefore conclude that I am no Chicago School apologist. Commissioner Rosch obviously disagrees. In this context, this is a rhetorical and political term not an economic one, so I don’t have much else to say about it — well, maybe one thing. Apologist is not a neutral word. I point this out because the use of the term “apologist” contradicts the Commissioner’s anecdotal introduction to his speech wherein he analogizes the intellectual debates in antitrust to the scientific debates over quantum mechanics and general relativity in characterizing the relationship between atoms and sub-atomic particles. The analogy appears to hint that the Commissioner endorses an approach grounded in the scientific method to settle these disputes. But the use of rhetoric like “apologists” to describe critics that have taken on the substance of ideas and evaluated the evidence in a manner consistent with social science methodology dispels that notion and suggests mostly interest in superficial labels and t-shirt slogans rather than serious engagement with ideas and evidence. Its use does not imply that Commissioner Rosch and I simply have different views on the relevant economics that we can debate on the substantive merits. Rather, it implies that I know that the competing economic approaches he advocates are superior, but I am in a state of denial or perhaps that I am just being intellectually dishonest about the Chicagoans losing the war of ideas in antitrust economics. I do not read the term as a neutral one. It’s important, however, not to get too distracted by name calling. As name calling is a tactic typically relied upon to avoid delving deeply into the substantive merits of an issue, its use signals that it is especially important to ignore it here. But I will say that, given its use, I’ve granted myself permission in this post to treat the Commissioner as a hostile witness, as it were.
The relevant question is not whether Commissioner Rosch’s views on economics and antitrust law and whether they do in fact, or do not, have those qualities that I’ve criticized in previous posts. I’ll focus on that issue in this post, and will argue that Rosch’s attempt to clarify his views on the role of economics and economists on antitrust was unsuccessful in the sense that 1) those views remain unclear in many instances, 2) are a primary example of the “model selection” problem described above, 3) will lead to overly aggressive antitrust enforcement, and 4) thus I conclude are likely to result in significant potential to harm consumers if they express agency enforcement priorities or policies.
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