Archives For neo-Brandeisian

At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.

Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.

Takeaways

    1. The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.

George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.

    1. The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.

Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”

Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”

And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:

[A]s soon as the  . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)

    1. The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.

In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.

  • Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
  • “Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
  • A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
  • Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
  • Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”

Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.

    1. The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.

In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.

Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.

    1. The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.

In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.

Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.

The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.

    1. The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.

Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.

Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.

    1. International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.

As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.

Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.

Other International Concerns

The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.

Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.

Conclusion

Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.

In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.

The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.

The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.

Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.

This post is the third in a three-part series. The first installment can be found here and the second can be found here.

As it has before in its history, liberalism again finds itself at an existential crossroads, with liberally oriented reformers generally falling into two camps: those who seek to subordinate markets to some higher vision of the common good and those for whom the market itself is the common good. The former seek to rein in, temper, order, and discipline unfettered markets, while the latter strive to build on the foundations of classical liberalism to perfect market logic, rather than to subvert it.

This conflict of visions has deep ramifications for today’s economic policy. In his classic text “The Antitrust Paradox,” Judge Robert Bork deemed antitrust law a “subcategory of ideology” that “connects with the central political and social concerns of our time.” Among these concerns, he focused specifically on the eternal tension between the ideals of “equality” and “freedom.” In recent years, that tension has been exemplified in competition-policy debates by two schools of thought: the neo-Brandeisians, whose jurisprudential philosophy draws from the progressive U.S. Supreme Court Justice Louis Brandeis, and another group represented by the Chicago School and other defenders of the consumer-welfare standard.

But this schism resembles similar divides that have played out countless times over the history of liberalism, albeit under different names and banners. Looking back on the past century and a half of economic and philosophical thought can help us to make sense of these fundamentally opposed visions for the future of both liberalism and antitrust. This history can also help us to understand how these ideologies have sometimes failed to live up to their ambitions or crumbled under the weight of their own contradictions. 

In this final piece in the political philosophy series, I explain the genesis, normative underpinnings, and likely outcome of the current “battle for the soul of antitrust.” The broader point that I have tried to make throughout this series is that this confrontation hinges on ethical and deontological considerations, as much as it does on “hard” consequentialist arguments. Put differently, how we decide to resolve foundational and putatively “technical” questions regarding the goals, standards, and enforcement of antitrust law ultimately cannot help but reflect our underlying views about the values and ideals that should guide a liberal society. In this vein, I argue that there are compelling non-utilitarian reasons to prefer a polity with an in-built bias for negative freedom and that is guided by a narrow economic-efficiency criterion, rather than the apparently ascendant alternatives.

The Birth of Neoliberalism

The clearest articulation of the philosophical schism between the two visions of liberalism that we see today came with the 1937 publication of “The Good Society” by American author and journalist Walter Lippmann. Lippman—who, like Brandeis, came out of the American Progressive Movement and had been an adviser to progressive U.S. President Woodrow Wilson—sparked the birth of “neoliberalism” as a separate strand of liberal political philosophical thought. The book invited readers to critically reexamine and, where appropriate, update the tenets of classical liberalism with a view toward “stabilizing and consolidating the course of an intellectual tradition that was otherwise bound to tumble straight into oblivion” (see here).  

This was the objective of the “neoliberal collective,” a loose affiliation of liberally oriented thinkers who convened for the first time at the Walter Lippmann Colloquium in 1938 to discuss Lippmann’s seminal book, and from 1947 onwards more formally under the auspices of the Mont Pelerin Society

Neoliberals grappled with questions that went to the very heart of liberalism, such as how to adapt traditional small-scale human societies to the exigencies of ever-widening markets and economic progress; the causes and consequences of industrial concentration; the appropriate role and boundaries of state intervention; the ability of markets to address the “social question”; the interplay between freedom and coercion; and the tension between the individual and the collective. Like Lippmann, the neoliberals were convinced that the failure to reckon with such fundamental issues would result in the inevitable displacement of liberalism by some form of “authoritarian collectivism,” which they believed provided emotionally appealing (but ultimately illusory) solutions to the full range of liberal problems.

It quickly became apparent, however, that there existed two main currents of neoliberalism.

The first, which I will call “left neoliberalism,” was a relatively conciliatory version that sought to strike a “mostly liberal” balance with socialism and collectivism. It postulated that markets are embedded in a broader social and political context that may include a strong and activist state, aggressive antitrust policy, robust social rights, and an emphasis on positive freedom. In this respect, their views resembled those of the Progressive Movement of Wilson and Brandeis, which was carried on into the mid-20th century in the United States by such figures as President Franklin Roosevelt, historian Arthur M. Schlesinger, and economist John Kenneth Galbraith. The “left neoliberals,” however, were primarily European, and included the likes of Wilhelm Röpke, Walter Eucken, Franz Bohm, Alexander Rüstow, Luigi Einaudi, Louis Rougier, Louis Marlio, and Jacques Rueff (and, arguably, Lippmann himself). 

Adherents to the other strand, “right neoliberalism,” were more conservative and less willing to compromise. They championed a strong but minimal state tasked with (and limited by) facilitating efficient markets, posited a lean antitrust policy, and emphasized negative liberty. Thinkers like Friedrich Hayek, Milton Friedman, Lionel Robbins, James Buchanan and, arguably, the more libertarian Ludwig von Mises and Bruno Leoni would fall into this group.

The Price Mechanism and the State

The two groups of neoliberals shared several basic postulates. 

First and foremost, they agreed that any revision of Adam Smith’’s “invisible hand” had to respect the integrity of the price mechanism (what Wilhelm Röpke referred to as the “sacrosanct core of liberalism”). The argument rested on utilitarian, but also political and ethical grounds. As Friedrich Hayek argued in “The Road to Serfdom,” the substitution of the free market for a centrally planned economy would lead to the loss of economic freedom, and eventually all other freedoms, as well. This meant that neoliberals were, on principle, harsh critics of any type of state intervention that distorted the formation of prices through the forces of supply and demand.

At the same time, however, neither strand of neoliberalism professed a doctrine of statelessness.  To the contrary, the state may, in hindsight, be neoliberalism’s greatest conquest. The question at hand is what kind of state is optimal. 

For the left neoliberals, a strong state was needed to resist capture by interest groups. It also had to exercise good political leadership and discretion in juggling goals and values (markets, after all, had to be “embedded” in the social order). These views were underpinned by a relatively sanguine set of expectations the left neoliberals had of the state’s willingness and capacity to protect the general interest, as well as their shared belief that the core institutions of liberalism (including self-regulating markets) were prone to degeneration and in need of constant public oversight. The state, not the private sector, was the ultimate ordering power of the economy. As Alexander Rüstow said:

I am, indeed, of the opinion that it is not the economy, but the state which determines our fate. 

The right neoliberal position was more ambivalent, due to its heightened skepticism toward state power. The bigger threat to freedom was not unfettered private power, but public power. As Milton Friedman put it in “Capitalism and Freedom”:

Government is necessary to preserve our freedom […] yet by concentrating power in political hands, it is also a threat to freedom. […] How can we benefit from the promise of government while avoiding the threat to freedom? 

The answer was a revamped Smithian nightwatchman that acted more as an umpire determining “the rules of the game” and overseeing free interactions between individuals than as a helmsman tasked with channeling society toward any particular variety of teleological goals. Like the left neoliberal position, this one, too, rests on a set of theoretical underpinnings.

One is that public actors are not any less self-interested than private ones, with the corollary that any extension or deepening of the powers of the state must be well-justified. The idea relied heavily on the public choice theory developed by James M. Buchanan, a member of Mont Pelerin Society and its president from 1984 to 1986. Thus, left and right neoliberals advanced almost completely opposite responses to the problem of capture. While left neoliberals believed in strengthening the state relative to private enterprise, the right’s critique led them to want precisely to limit state power and reshape institutional incentives.

This is not surprising, as right neoliberals were also more optimistic about the potential of markets and deontologically more preoccupied with negative freedom, a combination that added another layer of suspicion to any putatively progressive measures that involved wealth redistribution or meticulous administration of the market by the state.

Economic Concentration and Competition

Another important difference lay in the two sides’ views on economic concentration and competition. Some left neoliberals, particularly in Europe, internalized much of the Marxist and fascist critiques of capitalism, including the belief that markets naturally tended toward economic concentration. They argued, however, that this process could be reversed or prevented with robust antitrust and de-concentration measures. While essentially conceding Marxian arguments about the intrinsic tendency of competition to degenerate into monopoly—thereby fostering inequality and “proletarizing” the masses—they denied the ultimate implications upon which Marx had insisted—i.e., the inevitable “cannibalization” of capitalism through its inherent contradictions.

Right neoliberals, by contrast, insisted that, where economic concentration was not fleeting, it was generally the result of state action, not state inaction. As Mises argued, cartels were a consequence of protectionism and the artificial partitioning of markets through, e.g., tariffs. Similarly, monopolies formed and persisted because of “anti-liberal policies of governments that [created] the conditions favorable” to them. This implied that antitrust had a secondary position in securing competitive markets.

Each strand’s reasoning as to why competition was worthy of protection also differed. For the right neoliberals, who saw the legitimate goals and boundaries of public policy through the lenses of economic efficiency and negative freedom, the case for competition was principally a utilitarian one. As Hayek wrote in “Individualism and Economic Order,” state-backed institutions and laws (including antitrust laws) that “made competition work” (by which he meant, made competition work effectively) were one of the ways in which right neoliberals improved on the classical liberal position. 

Left neoliberals added political, social, and ethical layers to this argument. Politically, they shared the standard Marxian view that concentrated markets facilitated the capture of the state by powerful private interests. Marxists had, e.g., always asserted that Nazism was the product of “monopoly capitalism” and that the Nazis themselves were the tools of big business (the idea of “state monopoly capitalism” stems from Lenin). Left neoliberals largely agreed with this view. They also counseled that a centralized industry was more readily prone to takeover by an authoritarian state. In addition, they rejected “bigness” because they considered it an unnatural perversion of human nature (though such critiques surprisingly did not seem to translate to the state). As Wilhelm Röpke notes in “A Humane Economy”:

Nothing is more detrimental to a sound general order appropriate to human nature than two things: mass and concentration.

“Bigness,” Roepke thought, had come about as a result of one particularly harmful but pervasive trend of modernity: “economism,” a frequent target of left neoliberals that refers to a fixation with indicators of economic performance at the expense of deeper social and spiritual values.

But it would be a mistake to conclude that left neoliberals viewed competition as a panacea. Private property, profit, and competition (the foundations of liberalism) were as socially corrosive as they were beneficial. They were, according to Wilhelm Röpke:

justifiable only within certain limits, and in remembering this we return to the realm beyond supply and demand. In other words, the market economy is not everything. It must find its place within a higher order of things which is not ruled by supply and demand, free prices, and competition.

Competition, in other words, was as Luigi Einaudi put it, a paradox. It was beneficial, but could also be socially and morally ruinous. 

The Goals and Boundaries of Public Policy

The perceived failures of liberalism guided the contrasting notions of what a reformed neoliberalism should look like. On the one hand, European left neoliberals and American progressives thought that liberalism suffered from certain inherent deficiencies that could not be resolved within the liberal paradigm and that called for mitigating policies and social-safety nets. Again, these resonated with familiar criticisms levied by the right and the left, such as, e.g., excessive individualism; the loss of shared values and a sense of community; a lack of “social integration”; worker alienation (in an essay titled “Social Policy or Vitalpolitik (Organic Policy),” Alexander Rüstow starts by citing Friedrich Engels’ 1945 “The Condition of the Working-Class in England”); and the socially explosive elements of competition and markets. These spiritual dislocations arguably weighed more than any material or economic shortcomings, and were at the root of the liberal debacle. As Walter Eucken argued:

Quite obviously, the reasons for the anti-capitalistic attitude of the masses cannot be found in any deterioration of the living conditions brought about by capitalism. […] The turning of the masses against capitalism is rather a phenomenon that can only be understood in terms of the sensibilities of modern man.  

In response, the left neoliberals called for an “organic policy” that would approach markets and competition as not purely an economic, but also a social phenomena (a similar view was expressed by Justice Brandeis). In this new hybrid vision of liberalism, “there would be counterweights to competition and the mechanical operation of prices.” Competition and the market’s other imperatives would be tempered by balancing considerations and subordinated to “higher values” that were beyond the law of supply and demand—and beyond mere economic utility. As Wilhelm Röpke summarizes:

Competition, which we need as a regulator in a free market economy, comes up on all sides against limits which we would not wish to transgress. It remains morally and socially dangerous and can be defended only up to a point and with qualifications and modifications of all kinds.

Conversely, right neoliberals believed that the downfall of liberalism had been the result of a fundamental misunderstanding of its true ethos and an overabundance of conflicting rules and policies. It was not the inevitable upshot of liberalism itself. As Lionel Robbins posited:

It is not liberal institutions but the absence of such institutions which is responsible for the chaos of today.

Classical liberalism had stopped short on the road to exploring the full range of laws and institutions needed to sustain and perfect the “natural order.” But the prevalent social malaise—which had, no doubt, been adroitly instigated and exploited by collectivist demagogues—was not the result of some innate incompatibility between markets and human society. It had instead come about because of the failure to properly adjust the latter to the exigencies of the former. 

Additionally, right neoliberals rejected “organic” or “third way” policies of the sort favored by the left neoliberals, because they believed that it was not within the remit of public policy to answer existential questions or to provide “meaning” or “social integration.”  Granting the state the power to decide on such matters was a slippery slope that required it to override the preferences of some with its own. As such, it got dangerously close to the sort of collectivism that neoliberals rallied in opposition to in the first place. They also doubted the state’s ability to resolve such complex, value-laden questions. It was insights such as these that underpinned Friedrich Hayek’s theory of the gradual march towards serfdom and Ludwig von Mises’ quip that there is no such thing as a “third way” or a mixed economy. 

In consequence, the solution was not to restrain, mollify, or limit the spread or depth of markets in order to align them with some past ideal of parochial life, but to improve markets and to acclimatize societies to their workings through better laws and institutions.

Two Different Visions for Liberalism For Two Different Visions of Antitrust

In keeping with the theme of this series, the prescriptions for antitrust policy made by each strand of neoliberalism are not doctrinally extrapolated from their broader vision of society.

Left neoliberals and American progressives took Marxist and fascist attacks on liberalism seriously, but sought to address them through less radical channels. They wanted a “mostly liberal” third-way social order, in which markets and competition would be tempered by a host of other social and political considerations that were mediated by the state. This meant opposing “big business” as a matter of principle, infusing antitrust law with a host of non-economic goals and values, and granting enforcers the necessary discretion to decide in cases of conflict. 

Right neoliberals, on the other hand, sought to improve on the classical-liberal position through a more robust legal and institutional framework that operated primarily in the service of a single goal: economic efficiency. Economic efficiency—itself not a value-free notion—was, however, seen as a comparatively neutral, narrow, and predictable standard that, in turn, cabined enforcers’  scope of discretion and minimized the instances in which the state could override business decisions (and thus interfere with negative liberty). In the context of antitrust law, this tethered anticompetitive conduct and exemptions to the threshold requirement to find harms to consumers or to total welfare.

Conclusion

The pendulum of neoliberalism has swung in the past, with momentous implications for antitrust. The “Chicagoan” shift of the 1970s, for instance, was a move toward right neoliberalism, as was the “more economic approach” of EU competition law in the late 1990s. Conversely, more recent calls for the condemnation of “big business” on a range of moral and political grounds; “polycentric competition laws” with multiple goals and values; and the widening of state discretion to lead market developments in a socially desirable direction signal a move in the opposite direction. 

How should the newest iteration of the neoliberal “battle for the soul of antitrust” be resolved?

On the one hand, left neoliberalism—or what Americans typically just call “progressivism”—has intuitive and emotional appeal, particularly in a time of growing anti-capitalistic fervor. Today, as in the 1930s, many believe that market logic has overstepped its legitimate boundaries and that the most successful private companies are a looming enemy. From this perspective, a “market in society” approach—in which the government has more leeway to restrain corporate power and reshape markets in accordance with a range of social or political considerations—may sound more humane to some. 

If history teaches us anything, however, this populist approach to regulating competition is problematic for a number of reasons.

First, the overly complex web of mutually conflicting goals and values will inevitably require enforcement agencies to act as social engineers. In this position, they may use their enhanced discretion to decide whom or what to favor and to rank subjective values pursuant to personal moral heuristics. Public-choice theory and historical examples of state-led collectivist projects, however, counsel against assuming that government is able and willing to exercise such far-reaching oversight of society. In addition, as enforcers inevitably prove unfit to discharge their new role as philosopher-kings, and as their contradictory case law increasingly comes under contestation, activist attempts to widen the scope of antitrust law likely will be checked by the courts. 

Second, like the non-economic arguments against concentration raised today by progressives such as Tim Wu and Lina Khan, the left neoliberal position is largely based on aesthetic preference and intuition—not fact. Röpkean complaints about big business ruining the bucolic landscape where men are “vitally satisfied” in their small, tight-knit communities rests on a very idiosyncratic vision of the good life (left neoliberals romanticized Switzerland, for instance), and it’s one many do not share in the 21st century. Equally particular were Justice Brandeis’ own yeoman sensibilities, which led him to reject bigness as a matter of principle (unlike today’s neo-Brandeisians, however, he was also skeptical of big government). 

As to the persistent argument to curb “bigness” on political grounds: this would be more convincing if there was a clear, unambiguous relationship between market concentration or company size and the quality of democracy. This does not appear to be the case. In fact, the case for incorporating democratic concerns into antitrust seems unwittingly to rely on discredited Marxist theories about the relationship between German big business and the rise of Hitler. Unfortunately, these ideas have been so aggressively peddled by Marxists—who had a vested ideological interest in demonstrating that private corporations were the main culprits behind Nazism—during the 1960s and 70s that today they enjoy the status of dogma.

Alternatively, one might argue that the very existence of large concentrations of private economic power is antithetical to democracy because having the potential to exercise private power over another (without any actual interference) is anti-democratic (see here). But this lifts a particularistic vision of democracy—so-called republican democracy—over others. According to the more mainstream notion of liberal democracy, which gives precedence to negative freedom, any such interference with property rights may, in fact, be seen as deeply illiberal and undemocratic, especially as the inherent ambiguity of the “democracy” standard is likely to invite reprisals against political opponents.

Alas, right neoliberalism appears to be falling out of favor, as anti-market rhetoric seeps into the mainstream and politicians and intellectuals look to the past to find alternatives to a neoliberal system seen as too narrow and economistic. Ultimately, however, this may be precisely what we want public policy to be in a liberal world: focused on predictable and quantifiable standards that subject enforcers to the rigorous discipline of economic theory and leave them little space to act as social engineers or to exercise arbitrary authority. More than a century of intellectual effervescence and dangerous intellectual escapades has proven this to be the superior way to achieve both measurable policy outcomes that improve on the classical-liberal position and to avoid the Charybdis of state collectivism. In antitrust law, it has meant embracing economic analysis of the law and a narrow consumer-welfare standard to discern anticompetitive from procompetitive conduct. 

In the end, today’s “battle for the soul” of antitrust is a proxy for a much wider conflict of visions. Changing the consumer-welfare standard and the architecture of antitrust enforcement along lines preferred by progressives and left neoliberals would be both a symptom and a cause of a broader philosophical shift toward a worldview that makes some of the same deleterious mistakes it purports to correct: excessive government discretion in overseeing the economy; the subordination of individual freedom to an array of collectivist goals mediated by a public aristocracy; and the substitution of evidence-based policy for emotional impetus.

While the inherent contradictions and incongruence of that vision mean that the pendulum is likely to eventually swing back in the right direction, the damage will already have been done. This is why we must defend the consumer-welfare standard today more vigorously than ever: because ultimately, much more than the future of a niche field of law is at stake.

A new scholarly study of economic concentration sheds further light on the flawed nature of the Neo-Brandeisian claim that the United States has a serious “competition problem” due to decades of increasing concentration and ineffective antitrust enforcement (see here and here, for example). In a recent article, economist Yueran Ma—assistant professor at the University of Chicago’s Booth School of Business—found that economies of scale (an efficiency) were associated with a U.S. economy-wide rise in concentration in economic activities (not antitrust markets) and a growth in output over the last century. In particular, Ma explained (emphasis added):

New research observing 100 years of concentration in economic activities and investment in research and development shows that the dominance of large businesses has been increasing for at least a century and, as Marx conjectured, may be a feature of the increasingly stronger economies of scale that accompany industrial development. . . .

To understand the broad historical currents of concentration, we collected financial information of all US corporations by size groups for the past 100 years. . . .

To be clear, our focus is not market concentration for a particular product, which would require defining markets based on consumption activities. Instead, our focus is the business size distribution in the US, namely the extent to which larger businesses dominate in the total volume of production activities across the economy. . . .

The data reveals a persistent rise in the dominance of the top 1 percent and top 0.1 percent of businesses in the US. From 1918 to 1975, the SOI provided size groups sorted by net income (green line with circles). Starting in 1959, the SOI also provided size groups sorted by sales (red line with diamonds). The longest and most comprehensive size groups are sorted by assets, available since 1931 (blue line with triangles). No matter the measure you choose, the long-run increase in corporate concentration is clear. . . .

Just as Stigler, Marx and Lenin had predicted, the reason for increased concentration appears to be economies of scale. Among different industries, we find that the timing and the degree of rising concentration align closely with rising investment in research and development (R&D) and information technology (IT), measured using additional data from the Bureau of Economic Analysis (BEA). These types of investments usually require a certain degree of scale due to upfront spending, while also producing technological changes that enhance economies of scale. Accordingly, we use investment intensity in R&D and IT as a general indicator of firms exploiting economies of scale. . . .

We also find that increases in concentration are positively associated with industry growth. In particular, over the medium term (e.g., twenty years), industries that experience higher increases in concentration are also the ones that experience higher growth in real gross output. Correspondingly, their shares of economic output expand as well. . . .

A[ ] natural question is whether regulatory policies and antitrust enforcement drive the main trends we find. For instance, regulatory restrictions on interstate banking could have a direct impact on the size of banks (and we indeed observe rising concentration in banking when these restrictions were lifted). In most other sectors, we are not aware of policies that align with the patterns of rising concentration in our data. The past century witnessed several regimes of antitrust enforcement—however, rising corporate concentration has been a secular trend throughout these different antitrust regimes. We do not observe a significant relationship between corporate concentration in our data and standard aggregate antitrust enforcement measures, such as the number of antitrust cases filed by the Department of Justice (DOJ) or the budget of the DOJ’s antitrust division. Overall, we do not find evidence that antitrust shapes the economy-wide business size distribution, although it could have a more visible impact on the market for a particular product (which is closer to the domain of antitrust analyses).

Even if higher concentration in production activities comes from economies of scale, some contemporary observers fear that economies of scale will ultimately weaken competition and cultivate monopoly power (Lenin highlighted such concerns as well). Analyzing this question requires reliable measurement of market power. So far, most studies do not find rising markups (the standard measure of market power) before the 1980s, and some argue that markups have increased since the 1980s. Combined with our findings, the evidence suggests that stronger economies of scale does not always lead to stronger market power. It is possible that such a link may exist under certain conditions, and future research could shed more light on this topic.

In broad terms, Ma’s study describes a long-term rise in economic concentration (again, something entirely different from antitrust-relevant market concentration) in tandem with substantial increases in economies of scale and output expansion—overall, a story of long-term welfare enhancement. Antitrust-enforcement levels are not portrayed as significantly related to this trend, and there is no showing that rising economies of scale inevitably enhance market power. (Even possible increases in markups, whose existence has been contested, do not necessarily reflect an increase in market power, see here and here.)

Admittedly, Ma was engaged in a positive analysis of concentration, not a normative assessment. But her research certainly lends no support to the normative neo-Brandeisian notion that a drastic interventionist-minded overhaul of antitrust is required to address major competitive ills. To the contrary, one could logically infer that a dramatic rise in antitrust interventionism is not only uncalled for, but it could threaten the beneficial nature of rising economies of scale and output that have been shown to characterize the U.S. economy. One would hope that this inference would give Congress and U.S. antitrust enforcers pause before they embark on a novel interventionist path.

In the battle of ideas, it is quite useful to be able to brandish clear and concise debating points in support of a proposition, backed by solid analysis. Toward that end, in a recent primer about antitrust law published by the Mercatus Center, I advance four reasons to reject neo-Brandeisian critiques of the consensus (at least, until very recently) consumer welfare-centric approach to antitrust enforcement. My four points, drawn from the primer (with citations deleted and hyperlinks added) are as follows:

First, the underlying assumptions of rising concentration and declining competition on which the neo-Brandeisian critique is largely based (and which are reflected in the introductory legislative findings of the Competition and Antitrust Law Enforcement Reform Act [of 2021, introduced by Senator Klobuchar on February 4, lack merit]. Chapter 6 of the 2020 Economic Report of the President, dealing with competition policy, summarizes research debunking those assumptions. To begin with, it shows that studies complaining that competition is in decline are fatally flawed. Studies such as one in 2016 by the Council of Economic Advisers rely on overbroad market definitions that say nothing about competition in specific markets, let alone across the entire economy. Indeed, in 2018, professor Carl Shapiro, chief DOJ antitrust economist in the Obama administration, admitted that a key summary chart in the 2016 study “is not informative regarding overall trends in concentration in well-defined relevant markets that are used by antitrust economists to assess market power, much less trends in concentration in the U.S. economy.” Furthermore, as the 2020 report points out, other literature claiming that competition is in decline rests on a problematic assumption that increases in concentration (even assuming such increases exist) beget softer competition. Problems with this assumption have been understood since at least the 1970s. The most fundamental problem is that there are alternative explanations (such as exploitation of scale economies) for why a market might demonstrate both high concentration and high markups—explanations that are still consistent with procompetitive behavior by firms. (In a related vein, research by other prominent economists has exposed flaws in studies that purport to show a weakening of merger enforcement standards in recent years.) Finally, the 2020 report notes that the real solution to perceived economic problems may be less government, not more: “As historic regulatory reform across American industries has shown, cutting government-imposed barriers to innovation leads to increased competition, strong economic growth, and a revitalized private sector.”

Second, quite apart from the flawed premises that inform the neo-Brandeisian critique, specific neo-Brandeisian reforms appear highly problematic on economic grounds. Breakups of dominant firms or near prohibitions on dominant firm acquisitions would sacrifice major economies of scale and potential efficiencies of integration, harming consumers without offering any proof that the new market structures in reshaped industries would yield consumer or producer benefits. Furthermore, a requirement that merging parties prove a negative (that the merger will not harm competition) would limit the ability of entrepreneurs and market makers to act on information about misused or underutilized assets through the merger process. This limitation would reduce economic efficiency. After-the-fact studies indicating that a large percentage of mergers do not add wealth and do not otherwise succeed as much as projected miss this point entirely. They ignore what the world would be like if mergers were much more difficult to enter into: a world where there would be lower efficiency and dynamic economic growth because there would be less incentive to seek out market-improving opportunities.

Third, one aspect of the neo-Brandeisian approach to antitrust policy is at odds with fundamental notions of fair notice of wrongdoing and equal treatment under neutral principles, notions that are central to the rule of law. In particular, the neo-Brandeisian call for considering a multiplicity of new factors such as fairness, labor, and the environment when enforcing policy is troublesome. There is no neutral principle for assigning weights to such divergent interests, and (even if weights could be assigned) there are no economic tools for accurately measuring how a transaction under review would affect those interests. It follows that abandoning antitrust law’s consumer-welfare standard in favor of an ill-defined multifactor approach would spawn confusion in the private sector and promote arbitrariness in enforcement decisions, undermining the transparency that is a key aspect of the rule of law. Whereas concerns other than consumer welfare may of course be validly considered in setting public policy, they are best dealt with under other statutory schemes, not under antitrust law.

Fourth, and finally, neo-Brandeisian antitrust proposals are not a solution to widely expressed concerns that big companies in general, and large digital platforms in particular, are undermining free speech by censoring content of which they disapprove. Antitrust law is designed to prevent businesses from creating impediments to market competition that reduce economic welfare; it is not well-suited to policing companies’ determinations regarding speech. To the extent that policymakers wish to address speech censorship on large platforms, they should consider other regulatory institutions that would be better suited to the task (such as communications law), while keeping in mind First Amendment limitations on the ability of government to control private speech.

In light of these four points, the primer concludes that the neo-Brandeisian-inspired antitrust “reform” proposals being considered by Congress should be rejected:

[E]fforts to totally reshape antitrust policy into a quasi-regulatory system that arbitrarily blocks and disincentivizes (1) welfare-enhancing mergers and (2) an array of actions by dominant firms are highly troubling. Such interventionist proposals ignore the lack of evidence of serious competitive problems in the American economy and appear arbitrary compared to the existing consumer-welfare-centric antitrust enforcement regime. To use a metaphor, Congress and public officials should avoid a drastic new antitrust cure for an anticompetitive disease that can be handled effectively with existing antitrust medications.

Let us hope that the serious harm associated with neo-Brandeisian legislative “deformation” (a more apt term than reformation) of the antitrust laws is given a full legislative airing before Congress acts.

Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

Antitrust populists have a long list of complaints about competition policy, including: laws aren’t broad enough or tough enough, enforcers are lax, and judges tend to favor defendants over plaintiffs or government agencies. The populist push got a bump with the New York Times coverage of Lina Khan’s “Amazon’s Antitrust Paradox” in which she advocated breaking up Amazon and applying public utility regulation to platforms. Khan’s ideas were picked up by Sen. Elizabeth Warren, who has a plan for similar public utility regulation and promised to unwind earlier acquisitions by Amazon (Whole Foods and Zappos), Facebook (WhatsApp and Instagram), and Google (Waze, Nest, and DoubleClick).

Khan, Warren, and the other Break Up Big Tech populists don’t clearly articulate how consumers, suppliers — or anyone for that matter — would be better off with their mandated spinoffs. The Khan/Warren plan, however, requires a unique alignment of many factors: Warren must win the White House, Democrats must control both houses of Congress, and judges must substantially shift their thinking. It’s like turning a supertanker on a dime in the middle of a storm. Instead of publishing manifestos and engaging in antitrust hashtag hipsterism, maybe — just maybe — the populists can do something.

The populists seem to have three main grievances:

  • Small firms cannot enter the market or cannot thrive once they enter;
  • Suppliers, including workers, are getting squeezed; and
  • Speculation that someday firms will wake up, realize they have a monopoly, and begin charging noncompetitive prices to consumers.

Each of these grievances can be, and has been, already addressed by antitrust and competition litigation. And, in many cases these grievances were addressed in private antitrust litigation. For example:

In the US, private actions are available for a wide range of alleged anticompetitive conduct, including coordinated conduct (e.g., price-fixing), single-firm conduct (e.g., predatory pricing), and mergers that would substantially lessen competition. 

If the antitrust populists are so confident that concentration is rising and firms are behaving anticompetitively and consumers/suppliers/workers are being harmed, then why don’t they organize an antitrust lawsuit against the worst of the worst violators? If anticompetitive activity is so obvious and so pervasive, finding compelling cases should be easy.

For example, earlier this year, Shaoul Sussman, a law student at Fordham University, published “Prime Predator: Amazon and the Rationale of Below Average Variable Cost Pricing Strategies Among Negative-Cash Flow Firms” in the Journal of Antitrust Enforcement. Why not put Sussman’s theory to the test by building an antitrust case around it? The discovery process would unleash a treasure trove of cost data and probably more than a few “hot docs.”

Khan argues:

While predatory pricing technically remains illegal, it is extremely difficult to win predatory pricing claims because courts now require proof that the alleged predator would be able to raise prices and recoup its losses. 

However, in her criticism of the court in the Apple e-books litigation, she lays out a clear rationale for courts to revise their thinking on predatory pricing [emphasis added]:

Judge Cote, who presided over the district court trial, refrained from affirming the government’s conclusion. Still, the government’s argument illustrates the dominant framework that courts and enforcers use to analyze predation—and how it falls short. Specifically, the government erred by analyzing the profitability of Amazon’s e-book business in the aggregate and by characterizing the conduct as “loss leading” rather than potentially predatory pricing. These missteps suggest a failure to appreciate two critical aspects of Amazon’s practices: (1) how steep discounting by a firm on a platform-based product creates a higher risk that the firm will generate monopoly power than discounting on non-platform goods and (2) the multiple ways Amazon could recoup losses in ways other than raising the price of the same e-books that it discounted.

Why not put Khan’s cross-subsidy theory to the test by building an antitrust case around it? Surely there’d be a document explaining how the firm expects to recoup its losses. Or, maybe not. Maybe by the firm’s accounting, it’s not losing money on the discounted products. Without evidence, it’s just speculation.

In fairness, one can argue that recent court decisions have made pursuing private antitrust litigation more difficult. For example, the Supreme Court’s decision in Twombly requires an antitrust plaintiff to show more than mere speculation based on circumstantial evidence in order to move forward to discovery. Decisions in matters such as Ashcroft v. Iqbal have made it more difficult for plaintiffs to maintain antitrust claims. Wal-Mart v. Dukes and Comcast Corp v Behrend subject antitrust class actions to more rigorous analysis. In Ohio v. Amex the court ruled antitrust plaintiffs can’t meet the burden of proof by showing only some effect on some part of a two-sided market.

At the same time Jeld-Wen indicates third party plaintiffs can be awarded damages and obtain divestitures, even after mergers clear. In Jeld-Wen, a competitor filed suit to challenge the consummated Jeld-Wen/Craftmaster merger four years after the DOJ approved the merger without conditions. The challenge was lengthy, but successful, and a district court ordered damages and the divestiture of one of the combined firm’s manufacturing facilities six years after the merger was closed.

Despite the possible challenges of pursuing a private antitrust suit, Daniel Crane’s review of US federal court workload statistics concludes the incidence of private antitrust enforcement in the United States has been relatively stable since the mid-1980s — in the range of 600 to 900 new private antitrust filings a year. He also finds resolution by trial has been relatively stable at an average of less than 1 percent a year. Thus, it’s not clear that recent decisions have erected insurmountable barriers to antitrust plaintiffs.

In the US, third parties may fund private antitrust litigation and plaintiffs’ attorneys are allowed to work under a contingency fee arrangement, subject to court approval. A compelling case could be funded by deep-pocketed supporters of the populists’ agenda, big tech haters, or even investors. Perhaps the most well-known example is Peter Thiel’s bankrolling of Hulk Hogan’s takedown of Gawker. Before that, the savings and loan crisis led to a number of forced mergers which were later challenged in court, with the costs partially funded by the issuance of litigation tracking warrants.

The antitrust populist ranks are chock-a-block with economists, policy wonks, and go-getter attorneys. If they are so confident in their claims of rising concentration, bad behavior, and harm to consumers, suppliers, and workers, then they should put those ideas to the test with some slam dunk litigation. The fact that they haven’t suggests they may not have a case.

Near the end of her new proposal to break up Facebook, Google, Amazon, and Apple, Senator Warren asks, “So what would the Internet look like after all these reforms?”

It’s a good question, because, as she herself notes, “Twenty-five years ago, Facebook, Google, and Amazon didn’t exist. Now they are among the most valuable and well-known companies in the world.”

To Warren, our most dynamic and innovative companies constitute a problem that needs solving.

She described the details of that solution in a blog post:

First, [my administration would restore competition to the tech sector] by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.

* * *

For smaller companies…, their platform utilities would be required to meet the same standard of fair, reasonable, and nondiscriminatory dealing with users, but would not be required to structurally separate….

* * *
Second, my administration would appoint regulators committed to reversing illegal and anti-competitive tech mergers….
I will appoint regulators who are committed to… unwind[ing] anti-competitive mergers, including:

– Amazon: Whole Foods; Zappos;
– Facebook: WhatsApp; Instagram;
– Google: Waze; Nest; DoubleClick

Elizabeth Warren’s brave new world

Let’s consider for a moment what this brave new world will look like — not the nirvana imagined by regulators and legislators who believe that decimating a company’s business model will deter only the “bad” aspects of the model while preserving the “good,” as if by magic, but the inevitable reality of antitrust populism.  

Utilities? Are you kidding? For an overview of what the future of tech would look like under Warren’s “Platform Utility” policy, take a look at your water, electricity, and sewage service. Have you noticed any improvement (or reduction in cost) in those services over the past 10 or 15 years? How about the roads? Amtrak? Platform businesses operating under a similar regulatory regime would also similarly stagnate. Enforcing platform “neutrality” necessarily requires meddling in the most minute of business decisions, inevitably creating unintended and costly consequences along the way.

Network companies, like all businesses, differentiate themselves by offering unique bundles of services to customers. By definition, this means vertically integrating with some product markets and not others. Why are digital assistants like Siri bundled into mobile operating systems? Why aren’t the vast majority of third-party apps also bundled into the OS? If you want utilities regulators instead of Google or Apple engineers and designers making these decisions on the margin, then Warren’s “Platform Utility” policy is the way to go.

Grocery Stores. To take one specific case cited by Warren, how much innovation was there in the grocery store industry before Amazon bought Whole Foods? Since the acquisition, large grocery retailers, like Walmart and Kroger, have increased their investment in online services to better compete with the e-commerce champion. Many industry analysts expect grocery stores to use computer vision technology and artificial intelligence to improve the efficiency of check-out in the near future.

Smartphones. Imagine how forced neutrality would play out in the context of iPhones. If Apple can’t sell its own apps, it also can’t pre-install its own apps. A brand new iPhone with no apps — and even more importantly, no App Store — would be, well, just a phone, out of the box. How would users even access a site or app store from which to download independent apps? Would Apple be allowed to pre-install someone else’s apps? That’s discriminatory, too. Maybe it will be forced to offer a menu of all available apps in all categories (like the famously useless browser ballot screen demanded by the European Commission in its Microsoft antitrust case)? It’s hard to see how that benefits consumers — or even app developers.

Source: Free Software Magazine

Internet Search. Or take search. Calls for “search neutrality” have been bandied about for years. But most proponents of search neutrality fail to recognize that all Google’s search results entail bias in favor of its own offerings. As Geoff Manne and Josh Wright noted in 2011 at the height of the search neutrality debate:

[S]earch engines offer up results in the form not only of typical text results, but also maps, travel information, product pages, books, social media and more. To the extent that alleged bias turns on a search engine favoring its own maps, for example, over another firm’s, the allegation fails to appreciate that text results and maps are variants of the same thing, and efforts to restrain a search engine from offering its own maps is no different than preventing it from offering its own search results.

Nevermind that Google with forced non-discrimination likely means Google offering only the antiquated “ten blue links” search results page it started with in 1998 instead of the far more useful “rich” results it offers today; logically it would also mean Google somehow offering the set of links produced by any and all other search engines’ algorithms, in lieu of its own. If you think Google will continue to invest in and maintain the wealth of services it offers today on the strength of the profits derived from those search results, well, Elizabeth Warren is probably already your favorite politician.

Source: Web Design Museum  

And regulatory oversight of algorithmic content won’t just result in an impoverished digital experience; it will inevitably lead to an authoritarian one, as well:

Any agency granted a mandate to undertake such algorithmic oversight, and override or reconfigure the product of online services, thereby controls the content consumers may access…. This sort of control is deeply problematic… [because it saddles users] with a pervasive set of speech controls promulgated by the government. The history of such state censorship is one which has demonstrated strong harms to both social welfare and rule of law, and should not be emulated.

Digital Assistants. Consider also the veritable cage match among the tech giants to offer “digital assistants” and “smart home” devices with ever-more features at ever-lower prices. Today the allegedly non-existent competition among these companies is played out most visibly in this multi-featured market, comprising advanced devices tightly integrated with artificial intelligence, voice recognition, advanced algorithms, and a host of services. Under Warren’s nondiscrimination principle this market disappears. Each device can offer only a connectivity platform (if such a service is even permitted to be bundled with a physical device…) — and nothing more.

But such a world entails not only the end of an entire, promising avenue of consumer-benefiting innovation, it also entails the end of a promising avenue of consumer-benefiting competition. It beggars belief that anyone thinks consumers would benefit by forcing technology companies into their own silos, ensuring that the most powerful sources of competition for each other are confined to their own fiefdoms by order of law.

Breaking business models

Beyond the product-feature dimension, Sen. Warren’s proposal would be devastating for innovative business models. Why is Amazon Prime Video bundled with free shipping? Because the marginal cost of distribution for video is close to zero and bundling it with Amazon Prime increases the value proposition for customers. Why is almost every Google service free to users? Because Google’s business model is supported by ads, not monthly subscription fees. Each of the tech giants has carefully constructed an ecosystem in which every component reinforces the others. Sen. Warren’s plan would not only break up the companies, it would prohibit their business models — the ones that both created and continue to sustain these products. Such an outcome would manifestly harm consumers.

Both of Warren’s policy “solutions” are misguided and will lead to higher prices and less innovation. Her cause for alarm is built on a multitude of mistaken assumptions, but let’s address just a few (Warren in bold):

  • “Nearly half of all e-commerce goes through Amazon.” Yes, but it has only 5% of total retail in the United States. As my colleague Kristian Stout says, “the Internet is not a market; it’s a distribution channel.”
  • “Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate.” The real story, as the founders of Diapers.com freely admitted, is that they sold diapers as what they hoped would be a loss leader, intending to build out sales of other products once they had a base of loyal customers:

And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.

Like all entrepreneurs, Diapers.com’s founders took a calculated risk that didn’t pay off as hoped. Amazon subsequently acquired the company (after it had declined a similar buyout offer from Walmart). (Antitrust laws protect consumers, not inefficient competitors). And no, this was not a case of predatory pricing. After many years of trying to make the business profitable as a subsidiary, Amazon shut it down in 2017.

  • “In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government’s antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.” The government’s settlement with Microsoft is not the reason Google and Facebook were able to emerge. Neither company entered the browser market at launch. Instead, they leapfrogged the browser entirely and created new platforms for the web (only later did Google create Chrome).

    Furthermore, if the Microsoft case is responsible for “clearing a path” for Google is it not also responsible for clearing a path for Google’s alleged depredations? If the answer is that antitrust enforcement should be consistently more aggressive in order to rein in Google, too, when it gets out of line, then how can we be sure that that same more-aggressive enforcement standard wouldn’t have curtailed the extent of the Microsoft ecosystem in which it was profitable for Google to become Google? Warren implicitly assumes that only the enforcement decision in Microsoft was relevant to Google’s rise. But Microsoft doesn’t exist in a vacuum. If Microsoft cleared a path for Google, so did every decision not to intervene, which, all combined, created the legal, business, and economic environment in which Google operates.

Warren characterizes Big Tech as a weight on the American economy. In fact, nothing could be further from the truth. These superstar companies are the drivers of productivity growth, all ranking at or near the top for most spending on research and development. And while data may not be the new oil, extracting value from it may require similar levels of capital expenditure. Last year, Big Tech spent as much or more on capex as the world’s largest oil companies:

Source: WSJ

Warren also faults Big Tech for a decline in startups, saying,

The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.

But this trend predates the existence of the companies she criticizes, as this chart from Quartz shows:

The exact causes of the decline in business dynamism are still uncertain, but recent research points to a much more mundane explanation: demographics. Labor force growth has been declining, which has led to an increase in average firm age, nudging fewer workers to start their own businesses.

Furthermore, it’s not at all clear whether this is actually a decline in business dynamism, or merely a change in business model. We would expect to see the same pattern, for example, if would-be startup founders were designing their software for acquisition and further development within larger, better-funded enterprises.

Will Rinehart recently looked at the literature to determine whether there is indeed a “kill zone” for startups around Big Tech incumbents. One paper finds that “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.” Another shows an inverse correlation across 50 countries between GDP and entrepreneurship rates. Robert Lucas predicted these trends back in 1978, pointing out that productivity increases would lead to wage increases, pushing marginal entrepreneurs out of startups and into big companies.

It’s notable that many in the venture capital community would rather not have Sen. Warren’s “help”:

Arguably, it is also simply getting harder to innovate. As economists Nick Bloom, Chad Jones, John Van Reenen and Michael Webb argue,

just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.

If this assessment is correct, it may well be that coming up with productive and profitable innovations is simply becoming more expensive, and thus, at the margin, each dollar of venture capital can fund less of it. Ironically, this also implies that larger firms, which can better afford the additional resources required to sustain exponential growth, are a crucial part of the solution, not the problem.

Warren believes that Big Tech is the cause of our social ills. But Americans have more trust in Amazon, Facebook, and Google than in the political institutions that would break them up. It would be wise for her to reflect on why that might be the case. By punishing our most valuable companies for past successes, Warren would chill competition and decrease returns to innovation.

Finally, in what can only be described as tragic irony, the most prominent political figure who shares Warren’s feelings on Big Tech is President Trump. Confirming the horseshoe theory of politics, far-left populism and far-right populism seem less distinguishable by the day. As our colleague Gus Hurwitz put it, with this proposal Warren is explicitly endorsing the unitary executive theory and implicitly endorsing Trump’s authority to direct his DOJ to “investigate specific cases and reach specific outcomes.” Which cases will he want to have investigated and what outcomes will he be seeking? More good questions that Senator Warren should be asking. The notion that competition, consumer welfare, and growth are likely to increase in such an environment is farcical.

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.