Chapter 31: Public Policy in Respect to Monopoly

CHAPTER 31 PUBLIC POLICY IN RESPECT TO MONOPOLY § 1. Moral judgments of competition and monopoly. § 2. Public character of private trade. § 3. Evil economic effects of monopolistic price. § 4. Common law on restraint of trade. § 5. Growing disapproval of combination. § 6. Competition sometimes favored regardless of results. § 7. Increasing regard for results of competition. § 8. Common-law remedy for monopoly ineffective. § 9. Federal legislation against monopoly. § 10. Policy of the Sherman Anti-Trust Law. §11. Policy of monopoly accepted and regulated. § 12. Field of its application. § 13. The industrial trust,—a natural evolution? § 14. Artificial versus natural growth. § 15. Kinds of unfair practices. § 16. Growing conception of fair competition. § 17. The trust issues in 1912. § 18. Antitrust legislation of 1914. § 19. Guiding principles of the new policy. § 20. Some early fruits.

§ 1. Moral judgments of competition and monopoly. What should be the attitude of society toward monopoly? Is it good or bad as compared with competition? Some very strong ethical judgments bearing on practical problems are found in the popular mind connected with the ideas of competition and monopoly. Competition usually is pronounced bad when viewed from the standpoint of the competitors who are losing by it, and good when viewed from the standpoint of the traders on the other side of the market who gain by that competition. Competition among buyers thus appears to sellers to be a good thing; that among sellers appears to themselves to be a bad thing (and vice versa). Many persons are moved by sympathy to pronounce competition among low-paid and underfed workers to be bad, and each worker is convinced that it is so in his own trade. Yet nearly all men are of one mind that competition is a good thing in most 522 CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 523 industries, those that are thought of as supplying the " general public.'' Monopoly is believed by the public to be wrong in such cases, and competition to be the normal and right condition of trade. Yet there are some men interested in 'í large business'' who look upon competition as bad, and upon monopoly as having essentially the nature of friendly cooperation. The roots of these opinions, or prejudices, are easily discoverable in the theoretical study of the nature of monopoly.1 Yet often different men or groups of men feel so strongly on this matter, viewing it from their own standpoints, that they are quite unable to understand how any one else can feel otherwise. There is thus a great deal of controversy to no purpose.

§ 2. Public character of private trade. Any such general judgment as that of the public, though it may be mistaken in some details, is likely to be a resultant of broad experience. There is in competitive trade a public, a social character, which monopoly destroys. Even in a simple auction, when the bidding is really competitive, price depends far less on shrewd bargaining, on bluff, or on stubbornness, than is the ease in isolated trade. Each bidder is compelled by self-interest to outbid his less eager competitors, and thus the limits within which the price must fall are narrowly fixed. The auction-sale is less a purely personal matter, takes on a more public aspect, has a more socialized character, than isolated trade, depends more on forces outside the control of any one man, and results in a price fixed with greater definiteness. The price in a more developed market results from the play of impersonal forces, or at least from the play of personal forces which have come under the rules of the market.2 This price, men are ready to accept as fair. It has a democratic character, whereas the gains of monopoly price arouse resentment as being the work of personal power and felt to be despotic. Monopoly price is a bad price to the one who pays 1 See Vol. I, especially pp. 74 and 75.

2 See Vol. I, pp. 59, 68, 70, 71.

524 PUBLIC POLICY TOWARD PRIVATE INDUSTRY [PT. V it, not only because it is a high price but because it bears the character of personal extortion. The medieval notion of justum pretium, the just price, may have been often misapplied, and it was often criticized and ridiculed by economists in the period of idealized competition (from Adam Smith to John Stuart Mill). But at the heart of the notion was the judgment that general uniform prices fixed in the open market are the proper norms for prices when one of the traders is caught at an exceptional disadvantage. The modern world has been compelled to reëxamine the conception of the just price. § 3. Evil economic effects of monopolistic price. Theoretical analysis confirms this view. Any exercise of monopolistic power over price keeps some, the weaker bidders, from getting any of the desired goods, or limits them to their most urgently desired units. What may be called the "theoretically correct price''3 with two-sided competition is the one that permits the maximum number of trades with a margin of gain to each trader. In narrowing the possibility of substitution of goods by trade, the sum of values of goods for most men is diminished. Thus all citizens who are the victims of an artificially created scarcity look upon monopoly as "bad," just as they do upon the evils of nature—drought, locusts, fires, and pestilence. A monopoly has an indirect and more distant bad effect upon the spirit of all those trading with it. If they are producers selling at prices depressed by monopoly, their money incomes are reduced; if they are consumers buying at monopoly prices, their real incomes are reduced; in either case, their psychic incomes, the motives of all industry, are diminished and their industrial energies are relaxed.

§ 4. Common law on restraint of trade. The first recorded case in Englishjajw wherein the courts sought to prevent the limiting of competition bv agreement runs back to ¿fl]e year 1415T ìr\ t,hf> reign nf Henry V. This was a very « See Vol. I, pp. 66, 67.

CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 525 simple case of a contract in restraint of trade, whereby a dyer agreed not to practise his craft within the town for half a year. The court declared the contract illegal (and hence unenforceable in a court), and administered a severe reproof to the craftsman who made it. Thus was set forth the doctrine of the moral and legal obligation of each economic agent to compete fully, freely, and without restraint, even restraint imposed by a contract voluntarily entered into for his own advantage. Not until the eighteenth century was this rigid doctrine somewhat relaxed so as to permit the sale of the "good-will" of a business under limited conditions, and some "reasonable" contracts in restraint of trade. Later the emphasis was somewhat further shifted, by judicial interpretations, from the notion of i:ree competition to that 01 *'iairJJ competition so as to permircbntracTSJuvulviim uiud¾rmë restraint of trade, if the essential element of competition was retained.

Thus it was said tnat a piano manufacturer mignt by contract grant an exclusive agency to a dealer in a certain territory, there being many other competing makes of pianos, and such a contract "does not operate to suppress competition nor to regulate the production or sale of any commodity. ''4 But with such moderate limitations the courts in cases under the common law have steadily disapproved contracts in restraint of trade that would appear to be to the disadvantage of third parties, whether producers or consumers. § 5. Growing disapproval of combination. The attitude of the courts became in one respect stricter. Some earlier cases involved the doctrine that what is lawful for an individual to do alone is lawful if done in combination with others. Indeed, a comparatively recent case 5 declared, regarding a group of dealers agreeing not to deal with another, that 4 77 Miss., 47G. Cited by Bruce Wyman, "Control of the Market," p.

137. * 19 R. I., 255.

526 PUBLIC POLICY TOWARD PRIVATE INDUSTRY [PT. V "desire to free themselves from competition was a sufficient excuse" for such action. But the general trend has been to the doctrine that a combination of men "has hurtful powers and influences not possessed by the individual." Hence threats of associations of traders (retailers or wholesalers) not to deal with another if he continued to deal with some third party have been declared acts m restraint of trade"? Têt in the case cited the court seemed to have been more concerned with protecting "the individual against encroachment upon his rights by a greater power," "one of the most sacred duties of the courts," than with rights and interests of the general public endangered by such restraint of trade. § 6. f¾ninpfit.¾t.iMì anTflçtimes favored regardless of results. Jn another respect the courts have wavered in tÏÏeîr attitude toward competition, the general doctrine being that competition, particularly the cutting of prices, is absolutely justifiable, regardless of circumstances. ^In the leading English case7 the facts were that the larger steamship companies _sent to Hankow additional ships, now called, figuratively, fìî¾lllµ¾,' ` tü "slliasn treignts in order to ruin tramp Steamship owners and drive them out of the field. The courF held that this constituted no legal Wl'Oll¾ lu lli¾ U'alnp steañv~ ship owners, and scouted the idea of the court's looting at ike motives in þluU,-imiliii¾, ui ULinb iiito^B8idergtt5gm any way what the court called '[ some llüätf lliáry normal standard of freights and prices.IJ Anû ot this case the lawyer is forced to say: ll Undoubtedly the excellent opinion just quoted represents the law everywhere,'' even though there are other cases difficult to harmonize with it.8 To the economist, not bound in like manner by legal precedent, such a verdict seems short-sighted and mistaken. The court appears to have considered only the rights of the private litigants, the tramp steamship owners, not the e 115 Ga., 429.

7 Mogul Steamship Company v. McGregor (L. R. 23 Q. B. D. 598). s Bruce Wyman, "Control of the Market," p. 22. But see next §.

CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 527 rights and interests of the shipping public; it considered the immediate and not the ultimate effects of the "smashing" of rates; it allowed itself to be deceived by the appearance of acts that in outer form were competition, but that had as their purpose the strengthening and maintenance of monopoly. These acts are forms of the "unfair" practices that will be mentioned later.9 § 7. Increasing regard for results of competition. Despite the binding precedents, the courts in some later decisions have refused to look upon competition as good regarcf]f^«¾ of its motives arid nf its consequences. In a federal case 10 the judge, in a brief and acute dictum, recognized the evil of a rate war that would result from threats of definite cuts. They impair ''the usefulness of the railroads themselves, and cause great public and private loss." The court's opinion was no doubt largely influenced by the fact that railroad rates were already subject to regulation: "Every precaution has been taken by state legislatures and by the Congress to keep them just and reasonable,—just and reasonable for the public and for the carriers."

In a state case lx the facts were that a man of wealth started a barber-shop and employed a barber to injure the plaintiff and drive him out of business. The court recognized that while, as a general proposition, "competition in trade and business is desirable," it may in certain cases result in "grievous and manifold wrongs to individuals"; and in this case the "malevolent" man of wealth was declared to be "guilty of a wanton wrong and an actionable tort." The economist can but pronounce this judgment admirable as far as it goes, but it is remarkably confined to a consideration of the private legal rights of the injured competitor, and gives hardly a hint of a higher criterion for judging competitive acts, that of the general welfare. » See below, § 15. loAverrill v. Southern Railway (75 Fed. Rep. 736). ii 107 Minn. 145.

528 PUBLIC POLICY TOWARD PRIVATE INDUSTRY [PT. V The further enlightenment of judicial opinion upon the subject of cutthroat competition used as a tool to create monopoly was shown in the granting of an injunction by a federal court, in 1914,12 restraining the use of " fightingships" by a combination, and by the indication in 1915 13 of the willingness to grant a similar injunction if necessary. Similarly '' fighting brands'' of goods have been recently prohibited. § 8. Common-law remedy for monopoly ineffective. The common law contained prohibitions enough, both broad and specific, against contracts and acts in restraint of trade. The common law contained likewise a closely related body of doctrine by which the railroads, as common carriers, ought to have given equitable and undiscriminating rates to all shippers. There was a strong body of influential opinion that long maintained that the common law was sufficient to prevent monopoly, that the only thing needed was to enforce it. Even now, after all that has elapsed, there are some in railroad and business circles who still appear to hold that opinion. But the evils of railroad discrimination and of other monopolistic practices continued, and for some cause the common law was not enforced, excepting occasionally, disconnectedly, and without important results.

Why? The answer may be ventured that in^the common law the whole question of restraint of trade was treated prl· .jnarily as one of private rights and only incidentally as one involving general {Ju¯¾Jllc policy. Cases came bftforq thp, courts only on complaint of some individual who felt injured. Now the injury ot nigner prices due to contracts in restraint of trade is usually diffused among many customers, anc^* the loss "of anyone is less tnan the expense of bringing suit. Consequently, it rarely happened that cases were brought before the courts except by one of the two equally guilty parties to a contract in restraint of trade, when the other party had 12 216 Fed. 971. 13 22O Fed. 235.

CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 529 failed in some way to do his part. When such an illegal contract in restraint of trade was proved before a court by a defendant in a civil suit, the contract was declared unenforceable, and the only penalty in practice was that the plaintiff could not collect his debt or secure performance from the defendant.14 A very similar situation existed in the case of the individual's grievances against railroad charges and services. § 9. Federal legislation against monopoly. The passage of the Interstate Commerce Act in 1887 15 prohibiting discrimination and railway pooling, and that uf llie¯ Act of l¾9Û" "to protect trade and commerce against unlawful restraints an3¯¯^Tõncipõlies/' popularly known as the ''Sherman "Antitrust Law," were part of one^¯¯l)ubliu niuveinenl to remedy tKünõpõTÿ."" From one point of view it seems true, as has* often been said, that in essence these statutes were simply enactments of long-established principles of the common law.

Section 1 of the Sherman law declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." Section 2 made it a misdemeanor "to monopolize, or attempt to monopolize." But, from another point of view, these new laws showed a marked change both in the conception of the interests involved and in the means of preventing the evils. The evil was at last conceived of as a general public evil; the laws are not merely to protect individuals,16 but '' to regulate commerce," ''to protect trade and commerce." More important still, it was made the duty of public officers (district attorneys of the United States) to institute proceedings in equity "to prevent and restrain" violation of the Sherman Act, and a i*Arnott v. Pittston and Elmira Coal Co., 68 N. Y. 558 (1877). is See ch. 29. § ]5.

is At the same time the rights of injured individuals are better safeguarded by section 7 of the Sherman law. permitting the recovery of three-fold damages and attorney's fees.

530 PUBLIC POLICY TOWARD PRIVATE INDUSTRY [PT. V special Com mission was instituted to deal with railroad cases. It was this undertaking of the initiative by the government, the treatment of the problem as one of the general welfare, that marked a new epoch in this field. The methods and agencies provided might be at first inadequate and ineffective, but time and experience could remedy those defects. In important ways opinion and policies were not yet clear and consistent. They wavered from one to another conception of the method for dealing with the problem. It was clear only that laissez-faire had been laid aside. There are three other possible policies, reflecting as many different conceptions of the problem of monopoly: (1) monopoly prosecuted, (2) monopoly accepted and regulated, (3) competition maintained and regulated. § 10. Policy of the Sherman Anti-Trust Law. The policy of monopoly prosecuted embodied in the Sherman law is merely negative. It opposed no positive action to the making of monopolistic contracts and to the formation of combinations, but declared them to be illegal and provided for their prosecution and punishment after the mischief had Hoeen done. The great epoch of the formation of combina¿Tons17 followed the enactment of this law. True, lack of experience by the department of justice, and lack of vigorous effort to enforce the law, and the slow action of the courts were largely to blame for this result. The law has proved to be more effective to prevent new combinations, since it has been successfully enforced in a few notable cases. But once large combinations have been formed and complex individual financial interests have become involved, the courts have proved to be incapable of undoing the deeds.

In practice the most sweeping remedy attempted under the law has been the dissolution^ of enormous combinations formed years after the law went into effect. This has been called the job of unscrambling the eggs. The most notable cases were those of the Standard Oil Company and of the 17 See ch. 30. § 8.

CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 531 Tobacco Company, decided in 1911, the results being absurdly futile. § 11. Policy of monopoly accepted and regulated. A^ second policy may be called that of monopoly accepted and regulated. Tñis is represented by the Interstate Commerce Act (at first weakly, and more vigorously after its amendment), and by the great mass of state legislation putting the local and interurban public utilities under the control of regulative commissions. For some decades after these industries developed, the public faith was in competition as the effective regulator. If monopolistic þl'löes were too ñigñ, another company was "chartered to Mild a parallel railroad or another^ hur½e'-c'aí' line on the next street, or to lay down another sej, of gas-pipes m the same bl(Kík. Almost ìrom the first, some "slUde¯llL·¾ i)\` l,hH snh;iftftt saw the" wastefulness and futility of this kind of competition, and nearly a halfcentury later the^ µublic 1'elU.clantlv came to this view. Still, sad to relate, the same ñistory~had to be repeated in regard to the telegraph and telephone industry, and in some quarters the ultimate outcome is not yet recognized. The Interstate Commerce Act itself, with odd inconsistency, contains an anti-pooling provision (Section 5), the purpose of which seems to have been to compel competition as to rates, which is now practically impossible under the other provisions of the law. The policy of "monopoly accepted" iwas seen to involve as a necessary feature public regulation of rates to the point, if necessary, of absolutely fixing them. The principle has come to be accepted that wherever_competition ends therç ti_on of prices and service begins. Monopolistic enterprises are ipso jaczo quasi-public institutions.

§ -U. JJ¯ieia oi its application. Tïïîš policy, gradually extending in practice, came to be applied to the class of industries which, for lack of a better name, are called local utilities. The one characteristic that they all have in common is that the service, or product, which is sold requires for its delivery some special use of public highways and an expen532 PUBLIC POLICY TOWARD PRIVATE INDUSTRY [PT. V sive, permanent, physical plant, such as gas-pipes, waterpipes, poles and. wires. The telegraph, the telephone, electric lighting, street railways, regular steam railroads, and some other minor industries all answer to this test.18 Beginning about the year 1900, one state after another enlarged lllë p ^ ââted a new corporation commission to regulate these 'or '' public utilities.'; ia They have accompnsned much, but tEe development 01 this kind of regulation has not proceeded in many cases beyond the adjustment of relative rates and the abolition of discrimination among the different individuals and classes of customers. Experience has shown the ffreat. rHffip,nlty of Hpfft-PTnini^g what is a fair absolute level of charges^. A new science of accounting has been developing to assist in the solution of a problem the complexity of which transcends the agencies at hand to deal with it. With this policy applied to the local utility (and railroad) phase of monopoly, there remains still the problem of the industrial trusts in the manufacturing enterprises.

§ 13. The industrial trust—a natural evolution? The policy that one is inclined to favor regarding industrial trusts depends very much on one's answer to the question: Are or are not industrial trusts natural growths ? In this bare form the question is somewhat vague, but the thought of those who answer it in the affirmative is positive if not always entirely clear. They (at least, the extreme representatives of this view) declare that trusts have been, are, and will continue to be the results of a "natural evolution" of business conditions, as inevitable as the great changes in the physical world. If this is so, man and society must recognize the facts, must waste no efforts vainly in fighting against fate, but must accept the trusts and realize their possibilities for good. And these are declared to be great, for it is assumed that without the trusts all of the economies of large production must be is See further, ch. 32, §§ 5-9.

19 See ch. 29, § 3, on state coidmissions.

CH. 31] PUBLIC POLICY IN RESPECT TO MONOPOLY 533 sacrificed. Irresistible economic forces, it is said, are creating larger and larger units of business; friendly cooperation and unified action must take the place of competition in business. The outcome must be monopoly in every important line of manufacturing industry and perhaps of commerce. In view of public opinion toward monopoly, its acceptance necessitates its regulation. This argument is supported by appeal to the experience in the field of railroads and other local utilities, where public opinion has, after long hesitation, recognized competition to be impracticable and the acceptance of monopoly as inevitable. As extremes often meet, the view of the industrial trust as a natural evolution is most favored, on the one hand, by men of l' big business,'' already interested financially in trusts, and, on the other hand, by the most radical communists (or socialists) whose ideal is the complete monopolization of industry under the government.