2. Trade Associations and Codes of Ethics

The group’s accepted scheme of life is the consensus of views held by the body of these individuals as to what is right, good, expedient, and beautiful in the way of human life.

—Thorstein Veblen

Postwar efforts to change business motives from the singular pursuit of firm profits to the broader consideration of industry interests began with the trade associations. Trade associations went back many decades prior to the 1920s, but they took on added significance during World War I, serving as the principal mobilizing vehicles for the WIB. When the war ended and businessmen contemplated extending into peacetime the benefits derived from wartime industrial organization, it was only natural that their attentions should be drawn to the trade associations. Because the trade associations had their own industry-oriented self-interest and were subject to the control of industry members themselves, they provided attractive machinery for those desirous of advancing a collective view of the conduct of economic life. In contrast with the decentralized individualism of prior decades, the trade associations represented the emerging group-consciousness in industry, the coordinating arm of the new institutional order. In place of some vague abstraction, the trade associations gave visibility and a sense of reality to the various industries, and for this reason they were indispensable instruments in the development of an industrial perspective among businessmen.

In December 1918, the U.S. Chamber of Commerce held a conference in which representatives of the National Association of Manufacturers (NAM) actively participated. It went on record in favor of the creation of trade associations and urged all businessmen to join and support their respective organizations.¹ Taking such advice, many industries lost little time getting organized into trade associations, whose activities extended from efforts to create “cooperative” attitudes among competitors to the enunciation of specific “codes of ethics,” to proposals for politically structured industrial controls. Throughout the postwar years, various business representatives endeavored to fashion the most effective means for stabilizing and harmonizing trade practices, efforts that more often than not centered around the trade associations. Any effort to understand the transformation of business attitudes toward competition must include an examination of such industrial groupings.

TRADE ASSOCIATIONS AND THE “NEW COMPETITION”

The trade association movement had many promoters, but there were none more enthusiastic in their support than Herbert Hoover. While still secretary of commerce, Hoover offered this assessment of the centralizing trends within the business system:

I believe that we are, almost unnoticed, in the midst of a great revolution—or perhaps a better word, a transformation—in the whole super-organization of our economic life. We are passing from a period of extremely individualistic action into a period of associational activities.

Hoover shared the view of a number of business leaders that the trade association could not only establish collective standards of competitive behavior but could enforce those standards against the “small minority who will not play the game,” those few who “drive many others to adopt unfair competitive methods which all deplore.” In his opinion, the trade association was “the promising machinery … for the elimination of useless waste and hardship.”²

Hoover went on to discuss the motivations of the business community to regularize competitive practices:

Ever since the factory system was born there has been within it a struggle to attain more stability through collective action. This effort has sought to secure more regular production, more regular employment, better wages, the elimination of waste, the maintenance of quality or service, decrease in destructive competition and unfair practices, and ofttimes to assure prices or profits.³

The political scientist Theodore Lowi has stated the proposition more briefly: “In history and in theory, the law of the commercial marketplace is competition. The trade association seeks to replace this with an administrative process.”⁴

The campaign to create an environment conducive to a greater degree of business “cooperation” was not without some rather sophisticated rationales. One of the principal theoreticians for a system of industry-regulated competition was Arthur Jerome Eddy, who captured the imagination of business leaders with a book, originally published in 1912, titled The New Competition.⁵ Asserting that “Competition is War, and ‘War is Hell’,” Eddy went on to outline a program for altering the fiercely competitive conditions of the day through the use of the “open-price” system, Eddy, who envisioned a neoguild system for business, favored the grouping of each trade and industry into separate organizations, the purpose of which would be not to fix, but to report, prices, productive capacity, wage levels, “and all competitive practices.”⁶ The members would file with their association all inquiries, bids, and contracts, and such information would then be made available to other members. A critical factor in the open-pricing system was that no firm was required to agree to any price range or level, nor was it prohibited from altering its price structure once it was filed with the association. Firms making any such changes were required, however, to immediately report such changes. Through such a system, which attracted a great deal of business support, it was felt that business could be purged of an element considered sinister by many: secret prices.

It will become evident, in reviewing specific trade association “codes of ethics,” that pricing policies of competitors ranked as one of the primary sources of business discontent. Eddy recognized that concern when he summarized the advantages of the open-price association as including the elimination of “vicious bidding,” “secret bidding,” and “secret rebates, concessions, and graft.”⁷ Turning his attention to the role that the legal system would have in his program of “cooperation by publicity,” Eddy anticipated the conclusion later reached by other business leaders concerning the need for enforcement of trade standards against recalcitrants: “Men are so perversely constituted they seem to prefer compulsion to cooperation; they call upon the state to compel them by law to do what they ought to do for themselves, to frame rules of conduct they should voluntarily devise for their own protection.”⁸

The inherent contradiction of mandatory enforcement of voluntary codes was to plague the trade association movement throughout the 1920s. Under Eddy’s plan, legal assistance would be sought not only for purposes of publicizing all competitive practices but for “the suppression of all dishonest, fraudulent, oppressive and unfair business methods.”⁹ Eddy recommended the establishment of a federal commission, to be coequal with the Interstate Commerce Commission, to administer and enforce the law. Enforcement would be facilitated by a requirement that every corporation engaged in interstate commerce obtain a license from the federal commission.

Among the trade practices that Eddy proposed to make punishable offenses were the following: (1) failure of a firm to keep accurate records of all sales and purchases; (2) secret rebates and commissions; (3) billing at other than actual terms of sale; (4) false or misleading statements regarding costs, sales, and prices charged to others; (5) refusal to tell one buyer when lower prices have been charged to others for similar goods; (6) selling at or below cost; and (7) selling to one man or locality on terms better than those charged to a competitor or to other localities.¹⁰

Eddy foresaw the trade associations playing a central role in helping to enforce the provisions of the law and, in turn, the proposed commission having supervisory powers over the associations as well as the individual firms. Such powers would include authority “to review the acts of the association, if necessary revise and fix prices and conditions of purchases and sales, award damages, enforce penalties, [and] dissolve the association.”¹¹ Eddy’s ideas concerning the control of pricing policies of business firms contain the same thread of logic that became interwoven in the statements of business leaders, association “codes of ethics,” and governmental programs such as the Trade Practice Conferences and the National Industrial Recovery Act.

There were many business leaders who, although committed to the idea of trying to mitigate the competitive tempo, had certain misgivings about the use of the trade association to accomplish that purpose. In addition to the enforcement problems, many expressed concern that the use of trade associations to regulate trade practices within industries would constitute a violation of the antitrust laws. Past Supreme Court decisions, including the Trans-Missouri Freight Association case,¹² left business in doubt as to the permissible scope of trade association activity. As a consequence, rather than face either criminal prosecution or the abandonment of the association concept, some business leaders began advocating the amendment of the antitrust laws to allow for industry-wide agreements regulating trade practices. The U.S. Chamber of Commerce had conducted a referendum of its membership in 1919 on just such a question. The results showed almost 97 percent favoring congressional review of the antitrust laws; nearly 75 percent favoring the establishment of general business standards “to be administered by a supervisory body”; and nearly 72 percent favoring “an enlarged Federal Trade Commission” as the appropriate supervisory body.¹³

Concerns over the legality of effective trade association practices were not confined to the business community. Conflicts arose within the Harding administration between Attorney General Harry Daugherty and Secretary Hoover over the question of whether the statistical reporting practices of associations violated the antitrust laws. Daugherty—who apparently sensed a good deal of public animosity toward trade association practices—insisted upon an interpretation of the Sherman Act that would have all but emasculated statistical programs. Accordingly, he began a number of antitrust prosecutions to test his views in the courts. Hoover, on the other hand, favored statistical interchange not only as a means of promoting efficiency but for encouraging a more general stabilization of commerce and industry. Though he believed that competition should be the controlling influence in economic life, he was persuaded that cooperative activities among competitors could be harmonized with that purpose.¹⁴

By the mid 1920s, the U.S. Supreme Court had established rather clear parameters for permissible trade association activity. The “open-price” system came under attack in the American Column & Lumber¹⁵ and Linseed Oil¹⁶ cases. The trade associations involved had been receiving and reporting statistical information on the activities of their individual members, who were required not only to file periodic reports with the associations but to make their books available for association audit. The associations further endeavored to predict future pricing and production levels and made recommendations concerning future trade practices. In the American Column & Lumber case, the Court held such activities to be violative of the Sherman Act; it concluded that they had contemplated a “harmonious” competitive relationship, maintained not by “fines and forfeitures” but by “business honor and social penalties,—cautiously reinforced by many and elaborate reports, which would promptly expose to his associates any disposition in any member to deviate from the tacit understanding that all were to act together under the subtle direction of a single interpreter of their common purposes.”¹⁷ In the Linseed Oil case, the Court concluded that the purpose of the “open-competition” plan “was to submerge the competition theretofore existing among the subscribers and substitute ‘intelligent competition,’ or ‘open competition’; to eliminate ‘unintelligent selfishness’ and establish ‘100 per cent confidence,’—all to the end that the members might ‘stand out from the crowd as substantial co-workers under modern co-operative business methods.’”¹⁸

Following these two decisions, the U.S. Chamber of Commerce announced its support for the principle of allowing trade associations to engage in effective statistical reporting. Consistent with the results of its earlier referendum, the Chamber proposed abolition of any legal restraints upon such reporting. It is not clear whether the Chamber was advocating the collective reporting of the data for the industry as a whole or whether, as in the American Column & Lumber and Linseed Oil cases, it was urging a form of reporting that identified individual firms. The latter position can reasonably be inferred from the Chamber’s own language that spoke of the reporting of “actual prices in closed transactions.” Such a stand is also consistent with the prior practices of a number of trade associations that found individualized reporting a more effective source of intraindustrial pressures for trade practice conformity. On the other hand, the Chamber discouraged the use of such data for purposes of “concerted action” by association members.¹⁹

In two 1925 decisions—the Maple Flooring²⁰ and Cement²¹ cases—the Supreme Court upheld the reporting activities of two trade associations. Although, in Maple Flooring, the association’s past practices bore a great deal of similarity to those previously declared illegal, the association had altered its system in an effort to comply with the rulings in American Column & Lumber and Linseed Oil. In Maple Flooring and Cement, the associations continued to report on such matters as production, sales, and prices, but instead of identifying individual firms in their reports, they provided only aggregate, industry-wide figures. Further distinguishing their practices from the earlier cases, these associations avoided recommending future pricing or production policies, and broadly distributed their statistical data by including customers and public agencies as recipients of the same information sent to association members. The Court, drawing a clear distinction between these two pairs of cases, declared:

Competition does not become less free merely because the conduct of commercial operations becomes more intelligent through the free distribution of knowledge of all the essential factors entering into the commercial transaction…. Persons who unite in gathering and disseminating information in trade journals and statistical reports on industry; who gather and publish statistics as to the amount of production of commodities in interstate commerce, and who report market prices, are not engaged in unlawful conspiracies in restraint of trade merely because the ultimate result of their efforts may be to stabilize prices or limit production through a better understanding of economic laws and a more general ability to conform to them….²²

At first glance, the Court’s opinion in this case could be read as an apology for trade association efforts to restrain competition. Such a response, however, fails to consider the paradox that a condition of so-called perfect competition and effective industry methods to cartelize trade are often evidenced by identical factors. Both are premised, in part, upon identical prices in a market in which all participants have access to complete information. Thus, just as identical prices can be interpreted either as evidence of industry price-fixing or of “perfect competition,” the dissemination of detailed pricing and production information can be regarded as either fostering or inhibiting competition.

By 1925, then, the business community had a fairly clear view of the boundary line separating lawful from unlawful trade association activity. If the information was past- rather than future-oriented, was presented as aggregate, industry-wide data rather than as individualized firm practices, was distributed broadly rather than just to association members and, above all else, made no effort to recommend future pricing or production decisions to industry members, the reporting system would likely meet with Court approval. But these very limitations frustrated industry efforts to stabilize competitive trade practices. Having historical, industry-wide data was of some benefit in business decision-making, but it was of little help to the industry in combating price declines. Industry members desired an effective means of exerting pressure on the notorious “10 percent,” or what one trade association official called “the chiseling minorities,”²³ who would not “play the game.” Being able to identify the price cutters in an industry, having access to the critical pricing, production, and cost factors of one’s competitors, and being able to present such information in a way that would suggest, to industry members, the kinds of decisions that would encourage price stabilization—this is what interested businessmen and provided the underlying motives for the statistical reporting activities of trade associations. So much had the Supreme Court’s decisions minimized the value of such practices that, of the 150 trade associations acknowledging their use of “open pricing” in 1921, only 33 maintained the system in 1929.²⁴

Trade association efforts to promote competitive stability in the 1920s were not confined to such formal arrangements as “open-pricing” plans. Trade associations, trade publications, business leaders, and related organizations devoted a great deal of effort to the enunciation of business principles designed to foster a more “cooperative” business environment. A very general statement of principles, cast in the spirit of many already existing association codes, was announced by the U.S. Chamber of Commerce in 1924. The Chamber’s statement extolled “fair dealing” and a “fair profit” and criticized “waste in any form” and “excesses of every nature” (the latter including “inflation of credit” and “overstimulation of sales”). Another provision decreed: “Unfair competition, embracing all acts characterized by bad faith, deception, fraud or oppression, including commercial bribery, is wasteful, despicable, and a public wrong. Business will rely for its success on the excellence of its own service.” The statement closed by supporting “lawful cooperation among business men,” urging them to so conduct their businesses as to “render restrictive legislation unnecessary.” By September of that same year, some 270 trade associations and other business organizations had ratified the Chamber’s declaration.²⁵

An elaboration upon these basic principles was offered by Edwin B. Parker, who, as chairman of the Chamber’s Committee on Business Ethics, outlined his views as to what was meant regarding “unfair competition”: “[T]he seeking of a business advantage through efforts directed to harm a competitor is unethical and wasteful and will receive the unqualified condemnation of all right-thinking men. Whatever form such efforts may take entails economic waste and is repugnant to the public interest.” The principle of “lawful cooperation,” Parker declared, was based upon standards that were “essential to the intelligent conduct of business under such restrictions as will prevent abuses.” Though he did not specify the “abuses” he had in mind, the anticompetitive flavor of many of these provisions left little doubt as to the benefits anticipated by the Chamber from adherence to the spirit of such principles.²⁶ The distaste for unrestrained competition was voiced a few years later by Parker in a talk to the Chamber: “Business believes in wholesome competition, but competition is not primitive strife. Business knows that competition may become not the life of trade but in truth the death of the traders. Piracy masquerading as competition is piracy none the less.”²⁷ The same sentiment was expressed by F. M. Feiker, vice-president of the McGraw-Hill Company, who suggested that “cut-throat competition” results in “waste to the consumer” and “takes business scalps in a truly savage fashion.”²⁸ Wilson Compton, an officer of the National Lumber Manufacturers Association, offered similar views on the nature of competition:

Competition is not fair or free if it is not equal. And it cannot be equal between competitors of such widely different financial strength, sales facilities, and bargaining power as exist to-day in the various industries among the hundreds of thousands of separate individual selling units which are constantly besieging the same buyers, seeking the same business, in the same markets.²⁹

While one writer described the changing business atmosphere as one where “suspicion and injurious ‘cut-throat’ competition give way to a spirit of friendly co-operation and of confidence,”³⁰ Magnus W. Alexander, president of the National Industrial Conference Board (NICB), provided a more detailed account of the hoped-for consequences. Viewing business as “more than a medium for making profits by any means,” Alexander declared that the spirit of cooperation “aims to develop self-government in business, not because it fears the growing weight of the club of government, but because it believes that industry, if it wills so, can be a more effective policeman and judge of its affairs than can government.” The effectiveness of such policies would, according to Alexander, depend “on the spirit of the people and its government to give these molders [i.e., businessmen] a free hand within the limitations set by legal and moral law.”³¹

The NICB was, throughout the 1920s, a major promoter of effective methods of “business cooperation.” Begun in 1916, it served during World War I to help coordinate wartime economic planning. The NICB played the role of political activist, research publicist, and public relations proponent for American industry. It also had a primary role in the establishment of the War Labor Board. Its efforts on behalf of intraindustrial cooperation have been characterized by Robert Brady as the promotion of “unit thinking.” In the words of one trade association president, the NICB was responsible for “bringing about uniformity of thought and action among employers, woefully lacking in the past. We are thinking together.”³²

The consistency of purpose, the “uniformity of thought and action,” implicit in notions of “cooperation” and “self-regulation” can be seen in an examination of the statements of business leaders during this era. Edwin Parker, for instance, declared that “the one certain way in which business can escape the burden of government control and regulation is by self-regulation.” This principle of self-regulation was, according to Parker, bringing the nation into “The New Era of Business,” which he described as “the era of fair play, of better understanding, not alone between business and the public, but among the various branches of an industry.” To this end, Parker envisioned the creation of a trade relations committee—employing a vertical structuring of manufacturers, wholesalers, and retailers of each industry—to develop machinery of “self-government” in order to prevent trade “abuses” from becoming trade “customs.” Such a plan would, Parker maintained, “promote rather than restrict competition,” and he went on to suggest a procedure for implementation that was similar in format to the Trade Practice Conferences held under the auspices of the Federal Trade Commission.³³ Similar positions were expressed in a resolution by the U.S. Chamber of Commerce,³⁴ by Chamber president Lewis E. Pierson,³⁵ and by former Chamber president Julius H. Barnes.³⁶

It is quite clear from Parker’s remarks that he was looking beyond a system of “self-government” that existed only on a plane of ethical expression, and that he contemplated a condition under which such standards could be enforced against members of the industry who violated them. Such “self-government” was praised by a noted trade association attorney in these terms: “Business self-government, simply because it is self-government and not government imposed from an outside authority, is creating standards of conduct and measures of enforcement that are far more strict than any that have ever before been prescribed by governmental authorities or by the courts.”³⁷ The same sentiments were expressed by trade association executive Hugh P. Baker,³⁸ U.S. Chamber of Commerce president John W. O’Leary,³⁹ and Maryland governor Albert C. Ritchie—a man who had not only served as legal advisor to Bernard Baruch and counsel to the WIB but was later given serious consideration as an alternative to Franklin D. Roosevelt for the 1932 Democratic presidential nomination.⁴⁰

The success of the “cooperation” movement in helping to rationalize competitive practices was attested to by Lewis Pierson, who observed that during the preceding quarter-century American business had abandoned “the out-worn notions of unrestricted competition.”⁴¹ The “cooperation” that business hoped for was synonymous with the development of attitudes of respect for the positions of one’s competitors. Many business leaders sought to persuade—or compel, if need be—businessmen to abandon the aggressive, risk-taking, market-challenging practices that threatened other established firms. This was a “conservative,” status quo-defending endeavor in the purest sense of the term. In order to secure each firm from having to be continuously responsive to competitive threats, all were being asked to refocus upon the industry, rather than upon their individual firms, as the object of their self-interest. By stabilizing prices and trade practices, and by lowering the intensity of competition, business leaders hoped to create an environment in which no firm needed to fear substantial loss of business as a result of its inability to meet the test of a more rigorous, revenue-lessening competition.

Reflecting their desires for an effective system of price stabilization, business leaders identified “overproduction” as a cause of the inconstant competitive conditions within various industries. In the eyes of one observer, “[o]verproduction … has its origin in the rate of industrial expansion,” a condition that was accelerated not only by increased “use of power machinery and technological improvements” but by the demands of World War I. Such productive machinery, he went on, “is being operated without brakes or governor.”⁴² John E. Bassill, vice-president of Tubize Chatillon Corporation, found just such a mechanism of control in the Federal Reserve Board, which, he noted, can help to stabilize production—and, thus, prices—by restricting credit during periods of economic growth.⁴³ Such monetary policies, which continue to play a central role in government economic planning, afford another example of the recurring conflict between institutional interests in stabilizing environments in furtherance of their ends, and individual and societal interests in fostering the processes of “creative disequilibrium.” Whether appealing to a spirit of “cooperative” competition or more formal government programs, most of the business community was, during the time period under consideration here, preoccupied with efforts to restrain a vibrant economy.

It must be emphasized that the sentiment underlying the business campaigns against competition was more attuned to trying to stabilize competitive conditions (for example, eliminating sharp fluctuations in production and prices) than in trying to establish monopolistic or oligopolistic practices. Efforts to achieve such stability included pooling arrangements, mergers, associational activities, and, particularly in the steel industry’s use of the infamous “Gary dinners,” informal “price understandings.”⁴⁴ That such voluntary arrangements were almost entirely unenforceable—and, in some instances, raised the specter of antitrust prosecution—did not diminish the efforts of industry leaders to find some effective means of generating more stable competitive environments.

Writers of the 1920s confirmed that the American business community was seeking, through expanded trade association activity, an effective method of stabilizing pricing, production, and sales practices within the various industries. The New York Times observed that “an entirely new sort of government is being established in the United States,” consisting of

the sum of a large number of separate and unrelated agreements between self-governing economic groups to regulate their own concerns, to make rules for their own members, and even to punish those who violate them. It will be a government of voluntary cooperation, of self-determination along natural economic lines. … It is a pooling of the accumulated knowledge of the best way to do things in every field of industry and the formulation of that knowledge into a definite code backed by the sanction of all the interested parties. But this code is not usually compulsory, nor is obedience to it imposed under penalty of fine and imprisonment. On the contrary, it is a voluntary consensus of opinion followed by mutual agreement. Those instances in which it is compulsory are cases in which the original voluntary agreement has subsequently been written into the statutes of the several states.⁴⁵

Much the same conclusion was reached in a 1926 article in the Outlook, which noted that “American business … is making progress toward capacity for self-government” and is recognizing the principle of operating businesses according to the “common-sense rules of restraint, fair play, and consideration for the rights of others.” The growth of the institution of “codes of ethics” by trade organizations was looked upon as “proof… that American business would like to be self-governing in some better sense than that of every man for himself.”⁴⁶ One trade association official declared that “business has had to recognize the weakness of the individualistic theory and adopt a policy of cooperation,”⁴⁷ while Haley Fiske, president of the Metropolitan Life Insurance Company, added his praise for trade association activity that had helped “to enable members, especially the weaker ones, to stay in business in what is characterized as ‘a deplorable competitive situation.’”⁴⁸

THE CODES OF ETHICS

The trade association “codes of ethics” were generally considered, within the business community, important instruments for efforts to stabilize competitive relationships. Business attitudes toward these codes were reflected in the NICB’s observation that “the defects of the competitive system … are grounded in the inherent nature of competitive organization and control,” which, it went on, “arise from uncoordinated pursuit of competitive advantage.” Pointing to the “economic waste and industrial instability” that had carried “competitive struggle to destructive lengths,” the board’s study concluded that the trade associations had provided more effective machinery for the formulation and enforcement of trade principles, with the “somewhat elastic standards … giving place to more rigid codes.”⁴⁹ The content of these codes expressed, quite well, the anticompetitive attitudes that had developed within the business community as a response to vigorous economic behavior and the threat of change.

The majority of trade associations during the 1920s enunciated a “code of ethics” or “code of fair competition” as an expression of the minimal standards of competitive conduct desired by the firms in a particular trade or industry. Although a few of these codes attempted to establish enforcement machinery, most involved a combination of abstract statements of principles and condemnation of specific trade practices. The language of the codes was couched not so much in the legal rhetoric of penalties, fines, and injunctions as in the language of moral and ethical persuasion. The appeal was to one’s conscience, sense of ethics, or desire for approval and acceptance by one’s competitive peers. The “unfair,” the “questionable,” and the “unethical” were to be eschewed in favor of the “fair,” the “wholesome,” and the “responsible.” While such codes lacked any ultimate sanctions for enforcement, it would be a mistake to assume that they were intended, within the industries themselves, only as boilerplate. They served to reinforce within the minds of businessmen the new industry-oriented premise inherent in “cooperative competition.” The codes echoed the spirit of “cooperation” and were designed to promote those conditions that would serve to stabilize businesses, protecting them from the vicissitudes of change to which, increasingly, firms were unwilling to have to respond.

The business world had long considered many types of competitive practices to be “unfair.” Albeit some of these practices involved outright fraud and dishonesty (such as misbranding of merchandise or misrepresentation of product quality or package contents), it is evident that most of the practices complained of by businesses did not involve cheating customers, but were those that intensified the level of competition within an industry. Of greatest concern were the more aggressive practices through which some members of the industry were able to attract more business to themselves (and thus away from other members) by offering inducements to customers. Although one may rightly condemn as “dishonest” those practices in which a customer receives less than what he bargained for, the same charge cannot be leveled against sales practices that are attacked for their tendency to shift buyer preferences by reducing prices. In fact, the very effectiveness of the trade practices complained of were brought about and sustained by the ability of the firms employing them to satisfy customer demands on terms better than those of their competitors. The essential factor to keep in mind regarding a study of business code making is the overriding concern of businesses to protect themselves—not the customer—from the effects of aggressive competitive practices. The expression of concern for the customer was largely window dressing to gather public support and “legitimacy” for what was little more than a campaign to ease the burdens of free competition from the shoulders of firms at a competitive disadvantage.

Most association codes began with broadly worded declarations on behalf of a more polite and gentlemanly form of competitive behavior. Such language sought to incorporate the “golden rule” into business dealings or advocated a policy of “live and let live” among competitors. One code seemed to embrace every positive human emotion:

Always to deal with each other in a true spirit of justice, amity, courtesy and tolerance, and in pursuance of the elementary conception of right and honorable business conduct which should and must prevail in a society built upon the sure foundation of a democracy, organized in harmony with the most enlightened civilization in history, and finally directed to preserve individual opportunity and free and fair competition in the enhancement of the general welfare.⁵⁰

Others were less pretentious in asking their members not to “discredit or injure the industry,”⁵¹ or “unjustly discredit a competitor’s product.”⁵² They urged, instead, that they “practice clean, honorable competition"⁵³ and “respect the rights of competitors.”⁵⁴ Other abstract propositions of competitive civility can also be found in the codes.⁵⁵

The reactions of members of the business community to vigorous and effective methods of competition can be gleaned from the specific language within various codes. By looking to the precise trade practices complained of, as well as to the conditions being put forth as exemplary of a more “cooperative” spirit, one can better understand the direction being taken in business thinking. The crucial analytical point to be considered in examining the association codes is to determine both the intent and the effect of the specific practices condemned therein. Broad statements seeking to encourage greater “cooperation” might be designed only to promote personal, harmonious relationships among the members of an industry—without any motive to restrict competitive practices—or might be concrete evidence of cartelizing sentiments among businessmen. Only by looking to the particular prohibitions can an accurate judgment be made. In so doing, it can be seen that while a certain camaraderie was desired, such “fellowship” was looked to as a means of satisfying objectives more economic than social in nature.

Just what the “recalcitrant minority” was doing that so displeased the other members of an industry might be better understood by focusing upon one practice regarded by many as “unethical”: that of wholesalers doing “direct selling” to consumers. The members of the Eastern States Retail Lumber Dealers’ Association were desirous of curbing this practice and, in order to bring economic pressure to bear upon the wholesalers, entered into an agreement to report to the association the names of any offending wholesalers. Such names were then circulated, on a “blacklist,” to members of the association. While wholesalers did not wish to offend their retail customers, a few were nevertheless willing to risk exposure in order to increase their sales. In doing so, they earned for themselves a place on the “blacklist,” not because of any failings of character ordinarily associated with “unethical” behavior, but only because of a failure to respect the expectations of their competitors. The retailers, of course, complained that the wholesalers enjoyed a cost advantage that permitted them to offer lower prices to the consumers and that this made the practice “unfair.” But whatever the practice complained of—whether the “direct selling” here or the growth of “chain stores” denounced by the independent retailers, or the “price cutting” almost universally condemned by association codes—each reflected a more efficient method of doing business that, one way or another, would result in lower prices. When the U.S. Supreme Court held this “blacklisting” system to be an unreasonable restraint of trade under the Sherman Act,⁵⁶ it only added to the frustrations of companies trying to control the aggressive appetites of their competitors.

PRICING POLICIES UNDER THE CODES

Because prices were of central concern to business interests, a great deal of attention was paid by trade association codes to those practices that had a tendency to lower prices or encourage price instability. Since competition is presumed to be of social value and ordinarily involves two or more sellers trying to persuade customers to do business with them by the use of such inducements as lower prices, it is difficult to see who, other than an unsuccessful competitor, is injured by low prices. Nevertheless, trade associations have helped to create an all-too-common impression of “price wars,” “price cutting,” and “cutthroat competition” as being inimical to the general welfare and symptomatic of demoralized business conditions.

Just as trade associations attacked low prices for products because of their tendency to reduce industry revenues, some also assailed high prices paid to suppliers of raw materials for their tendency to increase production costs within the industry. This was demonstrated in a number of codes, such as that of the International Association of Milk Dealers, which prohibited the bidding up of raw milk prices paid to suppliers by “[i]nvading the competitor’s territory … and seeking to withdraw a competitor’s supply by paying or offering to pay patrons heretofore delivering to such competitor a higher price than he currently pays or offers to other producers,” or obtaining supplies of milk through offering “special inducements.”⁵⁷ Other trade associations attacked bidding “extravagantly on raw material that has been sold, in order to make trouble for a competitor,” as well as paying too high a price for equipment taken in as trade-ins.⁵⁸

Typical of the provisions contained in a number of other codes are those in the code of the American Bottlers of Carbonated Beverages. It contained a pledge by its members to charge a fair and reasonable price for their products, adding: “My desire shall not be to undersell my fellow bottlers, but to contend with them for first place in the quality of my products and the service I render my patrons.”⁵⁹ Further expression of the fear of lowered prices was found in the code of a leading textile trade association: “The manufacturer should scrupulously avoid price cutting without regard to costs or to the lowering of profits in the industry to dangerous levels.” It noted, “Legitimate competition is the life of the industry, but unscrupulous competition is injurious to yourself, to your competitor, and to your industry.”⁶⁰ Yet another association praised “intelligent cooperation” as preferable to “[i]gnorant, irresponsible and profitless competition,” and then offered the observation,

Nothing so shakes the confidence of the Public as the knowledge that only through haggling and bargaining can it be sure of obtaining the lowest and presumably fairest rates; nothing is so unfair to the unsuspicious and trusting customer; nothing is so damning to the effort to establish confidence and goodwill and to carry on our business legitimately and honestly on a plane of fair dealing with equal advantage to all.⁶¹

Raising the specter of “predatory price cutting,” a number of association codes moved to condemn “below cost” selling practices. Some codes declared as unethical the “[s]elling or offering to sell below cost or at less than a fair profit, to force a competitor out of a field.”⁶² Another provided that “none of the products of this industry should be sold, knowingly, below a price which would return to the manufacturer the cost of production plus a fair percentage of profit.”⁶³ Few trade associations would have taken exception with one retail group that spoke of a “fair profit based on the cost of doing business, plus a fair return on his investment” as being “the right of every merchant.” Nor would many have quarreled with the assertion that it was unethical “[t]o sell or offer to sell under a competitor’s price in order to beat him out of a sale or force him out of business.”⁶⁴

The “Declaration of Principles” of the National Retail Coal Merchants Association went further and provided a more specific statement of what it considered fair pricing. It began with the assertion that the retail coal merchant

is entitled to a fair return on his investment of capital and service. We believe in open competition unrestricted by municipal or Government regulations. Retail prices must be based upon cost plus fair profit. We therefore favor individual determination of prices on the basis of mine price plus transportation charges plus cost of retailing plus a fair return on investment of capital and service, no more and no less.⁶⁵

In a more emotional statement concerning pricing policies, the National Association of Retail Grocers, which had gone on record opposing “factory stores” as “un-American,” supported the principle of the “minimum resale price” or other methods of “standard price control” in order to protect all concerned from the actions of the “reckless price-cutter” who engages in “trade piracy.”⁶⁶ A general condemnation of selling below cost was contained in a number of other codes.⁶⁷

“Selling below cost” had a number of possible interpretations. The most implausible was that a business would undertake the production and sale of goods at a price that did not cover both fixed and variable costs. Except as a measure for accomplishing such purely short-term purposes as ridding itself of surplus inventories, or the quite limited “loss-leader” retailing practice of reducing prices sharply on one item in order to induce patrons to shop with them, it is rather apparent that no business would have adopted a long-range policy based on intentionally incurring losses. If a firm had inadvertently offered its goods at below-cost prices, it would not have taken long for that business to correct its error.⁶⁸ In fact, if a business had been unable to cover its variable costs, it would have (unless one adheres to the theory of “predatory price-cutting") shut down production until such time as the market price for such goods increased to some point above the level of its variable costs. Though a firm might have continued to produce and sell its goods at a price that covered variable costs but not its already incurred fixed costs, no additional production would have taken place if the firm had not anticipated recovering at least its variable costs.

Thus, little purpose would have been served by code provisions seeking to ban the selling of products at prices beneath the variable costs of the seller, prices that would reduce profits to the firm. The motivation to maximize profits would limit such selling. But trade associations were not simply seeking to condemn such an uneconomic practice as subvariable cost pricing. Selling “below cost” was understood to mean, as a number of codes spelled out, the selling of goods and services at prices that did not cover variable costs plus a properly allocated share of both fixed costs and “fair rate of return” on investment.

The fear of the so-called predatory price cutter has been one of the most popular criticisms of business behavior and continues to find expression in the study of competition and monopoly. This theory is premised on the belief that a firm would find it advantageous to intentionally sell its products at a price that would not return its costs in order to force prices down and, ultimately, drive its competitors out of business. The predator is supposedly able to accomplish its purposes by isolating a single market for the price cutting, funding its endeavors through a “war chest” created, in part, from the monopoly profits realized elsewhere by such methods. After having eliminated its competition, so the theory continues, the predator would be in a position to raise its prices, this time to a level that would allow it to enjoy monopoly profits in that market.

The fear of predatory pricing rests upon questionable grounds. In the first place, what some might regard as predatory behavior can bear a remarkable resemblance to a highly energized competition.⁶⁹ Secondly, there are definitional problems as to what would constitute predatory pricing. Phillip Areeda and Donald Turner have offered a definition that has provided a focal point for the debate: “A price at or above reasonably anticipated average variable cost” should not be regarded as predatory.⁷⁰ While there have doubtless been instances in which the practice, so defined, has been engaged in, the economic disadvantages to the predator in following such a course of action would seem to minimize any public policy concerns for such behavior. If a firm wants to eliminate its competition, it is less costly to buy out other firms than to try to drive them out of business through predatory tactics. After all, any firm engaging in such practices will have to incur greater losses than the intended victim, and since the firm practicing predation presumably enjoys the larger market share, its losses will be significantly greater than those of the victim. Further, there is too much risk associated with the employment of such methods. For instance, one cannot be certain that the intended “victim” will play the game: it might shut down until the predator ceases its tactics, thus incurring a temporary loss of business, but without suffering the destructive losses contemplated by the predator. The “victim,” after all, has a significant investment in its enterprise, and cannot be expected to passively allow itself to be driven out of business without making some rational response. But even if the victim is driven out of business, its assets will likely be sold to other firms or be taken over by the victim’s creditors, leaving the predator with yet another competitor to attempt to drive out of business. And if the predator overcomes all of these obstacles and actually begins to enjoy monopoly profits, its very success will invite new competitors into the market.⁷¹ It is conceivable, of course, that any particular firm might engage in predatory tactics by mistake (e.g., by a miscalculation of its costs, or a lack of awareness of other alternatives), but as a conscious strategy for eliminating a competitor in order to maximize the profits of the would-be predator, the practice would not represent an economically rational strategy.⁷²

The only conceivable effect, if any, of a code provision attempting to outlaw “predatory price cutting” or “selling below cost to force a competitor out of business” would be to maintain prices at a higher level than would otherwise have prevailed under aggressive competition. The pricing policies of a firm are, after all, determined on the basis of what serves to maximize its profits, not what can be done to injure the business of a competitor. If the lowering of a price will increase the sales volume, reduce unit costs, and increase the profits of the firm, then the decision will likely be made to lower the price. The attack on “predatory price cutting,” then, is not directed against the motives of the lower-priced firm but toward the effects that the profit-seeking pricing policies of one firm have upon its competitors. The businessmen who value the goodwill of their competitors more than likely interpret the admonitions against “below cost” and “predatory” pricing as warnings to keep up prices.

The attempt by some producers to obtain business — after having initially made higher bids—by undercutting the lower bids of their competitors was another common source of complaint that found its way into many association codes. The basic contention was that the firm submitting the low bid had “won” the right to the order and ought not be subject to any further competition from its rivals. The only circumstances under which such an occurrence could arise, of course, would be between the time the bids were submitted and the offer had been accepted by the person inviting the bids. Once accepted, a binding contract would come into existence, which would adequately protect the position of the firm whose bid had been accepted. Under such conditions, there would be a disincentive for the party inviting the bids to negotiate with the successful bidder’s competitors for a lower price. Thus, code provisions against seeking to undercut the bid of a competitor were aimed not at the practice of inducing a buyer to breach its contract with a competitor (for which, under the common law, both the buyer and the firm inducing the breach would be liable in damages), but at a business seeking to undercut a rival’s offer that had not yet ripened into a contract. Once a firm had submitted its own bid, in other words, and that offer had not been accepted by the firm inviting the bids, that firm should not then lower its bid in order to meet or undercut the offer of a competitor. Such an attitude was consistent with the belief popular among many businessmen that the process of “bargaining” was demeaning, an attitude that also found expression in the “open-pricing” systems.

Characteristic of code provisions dealing with this situation was that of the Northwestern Lumbermen’s Association, which stated: “The seller who offers a lower price for equal quality and quantity should get the order. It should not be given to his competitor who reduces his bid to meet competition or to undersell a competitor.”⁷³ One association had a provision enjoining the quoting of “ridiculously low prices on business that has been placed”; another prohibited quoting “fictitiously high prices” at the start of a transaction and later lowering them; yet another warned its members: “[D]o not oversell your own merchandise,” adding that “It is unethical to continue a solicitation after an order has been placed, or to influence a sale by price reduction or other inducements.”⁷⁴

Another form of price competition that consistently drew the wrath of a sizeable portion of the business community was the granting of rebates and discounts to customers. Because the effect of rebates and discounts was to lower the effective price to the buyer, the essence of business objections to such practices was the same as that attending other forms of price reduction. The fundamental concern was well expressed by Charles Gibson, chairman of the board of Gibson-Snow, Inc., who observed that “any dealer who is constantly getting an added discount… is the more strongly tempted to cut the price of his goods.”⁷⁵

One trade association code pledged itself against “the giving of free goods, secret rebates and those things which have a tendency to cheapen my products, as well as to demoralize the industry I represent.”⁷⁶ Still another association prohibited, in its code, “the allowance of secret discounts or rebates,” as well as “[g]iving away goods or samples other than is customary in such quantities such as to hamper and embarrass competitors or to have virtually the effect of rebates.”⁷⁷ Other codes attacked “all methods of rebating,” “deduction of excessive discounts,” “unjust returns of merchandise,” and “all other sharp practices.”⁷⁸

The question of rebates and discounts became entangled in another issue, that of price discrimination. The existence of price discrimination was but a reflection of the fact that different buyers are likely to have different intensities of demand. Under such circumstances, a profit-maximizing seller would have an incentive to offer his product to different buyers at different prices. Stated another way, the firm that offered a lower price to one buyer than to another did so not to inflict injury upon or to indulge a bias against the buyer paying the higher price, but for the purpose of concluding transactions with buyers of different demand preferences and different bargaining positions. Although the practice of price discrimination tended to evoke strong emotional reactions, nonuniformity in pricing is but the response of a seller seeking to maximize his profits in a market of nonuniform buyers.⁷⁹ The question has been asked:

Has it not been a common method of transacting business for generations to strike an independent bargain in each negotiation? And if the exploitation of some buyers, less crafty than others, occurs, is the seller responsible for their weaknesses? How, under a regime of private property and free exchange, impute moral delinquency to those who take full advantage of the weak bargaining power of other parties voluntarily dealing with them, or of their own superior strength in the market?⁸⁰

Price discrimination had been strongly opposed by many business interests desirous of eliminating cost differentials among competitors. Such differentials provided some firms with a comparative advantage over others in their pricing policies, a fact no more evident than in retailing, where the independent retailers found themselves up against the more efficient and ever-increasing chain stores who had been the principal beneficiaries of price discrimination. While Section 2 of the Clayton Act⁸¹ addressed itself to the question of price discrimination, the courts had—up until the Van Camp⁸² case in 1929—given a narrow interpretation to the section, holding that price discrimination was unlawful only if it tended to lessen competition between the seller and its competitors, not between the buyer and the buyer’s competitors.⁸³ Even though the Supreme Court broadened the scope of Section 2 in the Van Camp case, business support for stronger legislation dealing with price discrimination was to continue, culminating in the enactment, in 1936, of the Robinson-Patman Act.

Another selling practice that found almost universal condemnation in the codes was what was referred to as “commercial bribery.” Generally, this involved a seller offering a gift, commission, or other form of remuneration to the agent of a buyer in order to induce that agent to place an order with the seller. The gist of the “offense” has been stated as follows:

Whenever there is inducement to an employee to act contrary to the interests of his employer, or to an agent to act contrary to the interests of his principal, the transaction savors of corruption. And the trader who seeks thus to promote his sales is engaged in an unfair method of competition.⁸⁴

Concern over this practice was expressed by Williams Haynes, president of the Drug and Chemical Markets in New York City and long an opponent of “commercial bribery.” He defined the offense as “[t]he secret giving of commissions, money and other things of value to employees of customers for the purpose of influencing their buying powers.” Haynes had great praise for a bill, then in Congress, that would have provided fines or imprisonment for acts of “commercial bribery,” as well as immunity from prosecution to the first member of the “conspiracy of silence” who would, under oath, report this “evil” to a federal district attorney. That reaction against such so-called bribery was motivated by the price-reducing tendencies of such practices can be seen in Haynes’s particularization of offenses, which included not only the “cash bribe” but also “special rebates, double invoices, coupons redeemable in goods, elaborate presents, extra commissions for quantity orders or quantity sales.” As a contrast to such “evils,” Haynes was attracted to the “fixed price” in retailing, a method that had led to the abolition of “haggling barter” and, Haynes might have added, helped to foster the practice of “administered pricing” that has served to make economic transactions less subject to the individual influences of bargaining and negotiation.⁸⁵

“Commercial bribery” was widely attacked by business and industry leaders. A number of codes had prohibitions against “graft,” “bribes,” “bonuses,” or “commissions” to persons in the employ of a buyer,⁸⁶ while some codes condemned “long-term credits” and “excessive entertaining” as forms of “commercial bribery.”⁸⁷ Although, on the surface, the trade associations addressing such practices might be held up for praise for seeking to protect the integrity of the fiduciary relationship existing between a customer and his purchasing agent, it is highly unlikely that such a consideration was the motive behind those code provisions. After all, the customer would ordinarily be protected by the dealings of his agent in securing “commissions” for his placing of business because, under common law duties relating to principal and agent relationships, the agent, as a fiduciary, was required to account to the principal for any benefits he received from a third person with whom he was dealing for his principal. On the other hand, such payments to purchasing agents may not, in fact, have constituted a violation of a principal-agent relationship. The principal may, for example, have had an understanding with his agent that the latter could retain such bonuses as a form of extra compensation; or such payments might, in fact, have been turned over to the principal by the agent. In such cases, the only real objection that a seller’s competitors could have had to the practice would be that, like a rebate, it tended to lower the effective price of the product or service to the buyer.

ASSESSING THE TRADE ASSOCIATIONS

In reviewing the many trade association codes of ethics, one is impressed by the degree of specificity and certainty with which offenses were defined. Not content with the expression of glittering bromides, business associations wanted their codes to serve as bills of particulars for their industries so as to leave no question in the mind of a competitor what behavior was enjoined. The anticompetitive nature of such prohibitions is rather evident: the establishment of and adherence to trade standards, including pricing and sales practices of the sort discussed herein, have a tendency to standardize the conditions under which competition will take place. By eliminating certain practices from the scope of permissible activity, variations in competitive methods are reduced. This, in turn, introduces a greater degree of predictability and stability in trade relations. Under conditions of free and unrestrained competition, there will be a wide range of trade practices and pricing policies to which the firms in an industry must be prepared to respond in order to successfully compete. Firms will have an incentive to be innovative and inventive, conscious both of reducing costs and expanding markets. Because all firms would be subject to such conditions, the intensity of competition among them would be very great, with the more aggressive members of the industry engaged in practices that the others might not have to emulate, but would have to take into account and respond to in formulating their own policies.

It must be remembered that the period here under study was, as Taeusch and others have noted, characterized by significant changes in the structure and content of various industries as well as the organizational forms and methods of doing business. Many business leaders sought to respond to the threats posed by such changes by reducing the vigor with which they were exhibited in competitive practices. By standardizing trade practices, the innovative and aggressive firms would lose their comparative advantages over the firms less willing or able to maintain the more energized pace. Competition would thus become less threatening, reducing the responses firms would have to make to their more aggressive competitors.

The established firms would, quite understandably, find such competitive restrictions particularly beneficial, for a newer firm would, in order to attract customers away from the older firms, have to offer significant inducements, This is a problem always faced by a newcomer. The existing firms enjoy an immense advantage by virtue of their goodwill and established positions, a situation that can be overcome only by recourse to the most effective competitive methods. But if competitive methods become fairly standardized, and the newer firm is required to adhere to the same patterns as the established firm, the newcomer will find itself at an even greater disadvantage: it will have been deprived of the means of offering the necessary inducements to attract customers away from the established firms. Add to this the disadvantage of being labeled an “unethical” businessman if one should have the temerity to attempt such an assault on the industry’s “establishment,” and one can readily see the attraction existing firms had to efforts to standardize trade practices. One prominent industrialist, Owen D. Young, chairman of the board of both General Electric and the Radio Corporation of America, expressed his attraction for such standardization:

I am very hopeful that as time goes on we will become standardized, not only as to machinery, but that we may also become standardized in regard to conduct to the point that we will have sufficient confidence in ourselves so that we will know that we do not and dare not violate the standards of the group.⁸⁸

Rexford Tugwell, an economist who was later to become one of the principal architects of the New Deal, characterized the role of trade associations as being, in part, to coordinate and regularize conditions within various industries. That function was accomplished, to some extent, by the exchange of trade information, which had the effect of spreading “throughout industry very quickly knowledge of the latest processes and to bring each unit or business in the trade more rapidly up to the standard of the best.” In his view, the overall effect of the association movement was “to facilitate voluntary coordinations,” an influence with a “general effect on the regularization of the necessary mutual adjustment between supply and demand.”⁸⁹

THE FAILURE OF VOLUNTARY RESTRAINTS

The business community has had within it those who have been quite resourceful in attempting to devise workable systems for modifying the intensity of competition in their respective industries. Such attempts, when voluntarily undertaken, have generally proved ineffective.⁹⁰ The history of the trade association codes of ethics reveals that, in spite of the good intentions that accompanied their establishment, these efforts to short-circuit the competitive processes were also doomed to failure. As the pioneer student of business codes, Edgar Heermance, has observed:

The difficulties in the way of a trade agreement come both from the companies that are outside the combination and from those that are in. To control production, it is necessary to hold in line substantially all the producing units…. There seems to be something in the nature of an agreement which tempts the weak-kneed competitor to break it, in order to reap an immediate advantage.⁹¹

The conflict existing between the individual interests of the firms in an industry, and the collective interests of the industry itself (as represented in the trade associations) is explained by economist Mancur Olson’s analysis of collective action.⁹² Under conditions of perfect competition (in which prices are uniform and no single firm can, by altering its production, significantly influence the price level), each firm will have a profit-maximizing incentive to increase its production and sales. As each firm is operating under the same incentives, the combined effect will be a lowering of prices. Assuming an inelastic demand curve for the industry, its total revenues will decline. In spite of such declines in prices and industry revenues—in fact, even if each firm has advance knowledge of such consequences—each will have an incentive to increase its production until such time as the price level falls below the costs of production. As long as there is a net gain to any firm in putting an additional unit on the market, it will do so regardless of the effect on the industry as a whole. Olson thus summarizes the point: “[W]hile all firms have a common interest in a higher price, they have antagonistic interests where output is concerned.”⁹³ He continues: “[S]ince the larger the group, the smaller the share of the total benefit going to any individual, the less likelihood [there is] that any single individual will gain enough from getting the collective good to bear the burden of providing even a small amount of it.”⁹⁴ Relating Olson’s analysis to the inquiry before us, “the fact that profit-maximizing firms in a perfectly competitive industry can act contrary to their interests as a group"⁹⁵ helps explain the failure of voluntary efforts to restrain the pursuit of individual self-interest.

The inherent conflict existing between individual and collective interests was elaborated upon by Olson:

A group of profit-maximizing firms can act to reduce their aggregate profits because in perfect competition each firm is, by definition, so small that it can ignore the effect of its output on price. Each firm finds it to its advantage to increase output to the point where marginal cost equals price and to ignore the effects of its extra output on the position of the industry. It is true that the net result is that all firms are worse off, but this does not mean that every firm has not maximized its profits.

Further,

[I]t is now generally understood that if the firms in an industry are maximizing profits, the profits for the industry as a whole will be less than they might otherwise be…. [T]his is true because, though all the firms have a common interest in a higher price for the industry’s product, it is in the interest of each firm that the other firms pay the cost—in terms of the necessary reduction in output—needed to obtain a higher price.⁹⁶

Other factors—previously considered in the discussion on so-called predatory pricing—contributed to the failure of voluntary attempts to restrain competitive activity. First, such agreements were almost never entered into by all members of a given industry. The proverbial “10 percent” who would not agree with the policies of the rest of the industry would continue to employ aggressive competitive methods that, to the degree they were successful, would draw customers away from the firms holding out for higher prices. Second, even if all firms in the industry had adhered to an agreement moderating trade practices, to the degree such an arrangement succeeded in keeping prices above a competitive level new entrepreneurs would see the profitability of entering that industry and selling at a lower price.

The firms that agreed, in principle, not to engage in certain trade practices undoubtedly did so in the hope that, by their assent to a “code of ethics,” their competitors would be less inclined to engage in such practices. But whether one’s competitors abided by the agreed-upon standards or not, each firm would find it to its benefit to continue to increase its production and sales so long as the market price exceeded its costs of production. Even assuming the best possible case for the anticipated consequences, namely, that all firms would be better off if each would adhere to price-maintaining code provisions, the fact that each individual firm would be better off violating the code made such efforts unworkable. In the end, these voluntary restraints failed because, being voluntary, there was no way to compel firms to abandon the pursuit of their self-interest.

The policy implications in all of this have been spelled out by Olson. He concludes that “unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests.” While, as Olson states, all firms have an interest in the benefits arising from collective action, it will always be to the interest of each firm to have others pay the cost (e.g., by reducing production in order to promote higher prices). Olson summarizes the point: “The larger a group is, the farther it will fall short of obtaining an optimal supply of any collective good, and the less likely that it will act to obtain even a minimal amount of such a good. In short, the larger the group, the less it will further its common interests.”⁹⁷

Consistent with Olson’s analysis, voluntary efforts to restrain the pursuit of firm self-interest in favor of securing industry objectives met with failure. This failure led many business leaders and trade associations—particularly those in industries that had experienced relatively low profit levels in the 1920s—to support political solutions to what was considered the problem of “profitless prosperity.” Employing a study by Ralph C. Epstein that demonstrated the relative profit levels of different industries, Robert Himmelberg has concluded that business leaders in such lower-profit industries were the strongest advocates not only of revision of the antitrust laws but of “legalized cartelism” following the onset of the Great Depression.⁹⁸ They were not, however, the only members of the business community to seek answers to their problems in legislative halls.

While some 1920s contemporaries maintained that the principal motivation for “self-government” came from a desire by business to avoid government regulation,⁹⁹ Olson’s appraisal offers a more realistic explanation. Businessmen saw in a condition of free and unrestrained competition a threat to stable prices, the preservation of existing markets, and the maintenance of the value of their assets. Free competition was viewed as an invitation to the forces of change, a condition inconsistent with business desires for stability and permanency. Group interests suffered as individual firm interests were being maximized, all to the ultimate benefit of customers who enjoyed lower prices. Many business leaders began to understand that the collectivizing demands of the new institutional order required a partnership with the political state. The coercive machinery of government not only helped assure adherence to group schemes to subvert market processes and render competition less effective, but provided the mucilage to hold otherwise autonomous business units in line.