Do Antitrust Laws Preserve Competition; S. Petro

Sylvester Petro Do AntitrustLaws Preserve Competition? THE ANTITRUST laws are commonly thought to be the institutions that distinguish the economic system· of the United States from the rest of the non-Soviet world. But for these laws, it is said, we should be plagued with cartelization as in Great Brit·· ain, Germany, or France. Many be·· lieve, in short, that the antitrust laws are responsible for our having~ a competitive society. Preserving competition might have been the objective about 1890 when the basic act was passed. But cer·· tainly for the past generation the antitrust laws have not functioned to that end. Rather than preserve J, they have through questionable in·· Dr. Petro Is author of The Labor Policy of the Free Society and numerous other scholarly books and ar ticles. He Is Research ,Professor of Law at 8aylor University. An Informal seminar discussion at The Foundation for Economic Education was subse quently compressed Into this article first published In the October 1957Freeman.

terpretation and administration in fact impaired competition, by subsi dizing and preserving inefficient competitors. By competition, I refer to a situa tion that exists when the basic rules of the free society are observed when everyone possesses the basic rights of private property and free dom of contract. Competition is not a mode of conduct that anyone has to promote institutionally. It devel ops naturally and necessarily among persons who are free to pursue their own interests. Whatever one's per sonal interest or objective may be businessman, sculptor, or preacher the consequence of pursuing it puts him in competition with all who share that objective. That being the case, preoccupation with promoting competition is at best a diversion of effort which could have been used to protect private property and free223 224 THE FREEMAN April dom of contract. My thesis is that we have erred in the formulation and application of the antitrust laws of tlle United States.

A List of the Laws What are these laws? The first is the Sherman Act of 1890. This law makes every contract or combina tion in restraint of trade and every conspiracy to monopolize the trade or commerce of the United States a misdemeanor. Next came the Clayton Act in 1914, declaring unlawful specific types of contract, such as a tying agreement or an exclusive sales contract, when the result may be to lessen competi tion or tend to create a monopoly. The Clayton Act was intended to clarify or make concrete the general proscriptions of the Sherman Act. Usually included among the anti trust laws is the Federal Trade Commission Act which broadly states that unfair methods of competition shall be subject to prosecution. Though Fair Trade laws are laws of particular states, they also come under the heading of antitrust laws. All provide that when a contract is made between the seller or manu facturer of certain goods and a re tailer, providing for a specific resale price, then all purchasers of these goods with notice of the main con tract are bound to observe the price set in that main contract. These state Fair Trade laws all grew out of what I believe to be unfortunate decisions under the Sherman Act prohibiting a resale price maintenance contract between a manufacturer and a re tailer.

Though I see no violation of free dom of contract if a retailer is will ing to sell at the resale price stipu lated by the manufacturer, the Supreme Court thought restraint of trade was involved and held such re sale price maintenance contracts unlawful. Conditions in the 1933 depression prompted many states to pass -Fair Trade laws, and Congress suitably amended the Sherman Act to validate such state laws. But these laws now go much further than leg itimatizing a reasonable contract between a manufacturer and a re tailer; they enable that manufac turer and retailer to fix prices for all persons who come into possession of the goods in question. Such binding without consent appears to violate the principle of freedom of contract-a case of having pushed the Sher man Act to reach an anticompetitive result. The Robinson-Patman Act of 1936 is the last of the antitrust laws worth noting here. This act, in general, provides that the price-including such things as advertising allow ances or brokerage fees-for goods of like grade and quality must be the same to all purchasers, subject to these qualifications: (1) A price discrimination is not unlawful if it 1981 DO ANTITRUST LAWS PRESERVE COMPETITION? 225 can be demonstrated that it has no tendency to limit competition or cre ate a monopoly. (2) If the seller can demonstrate that his costs of selling are lower to buyer A than to buyer B, then he may charge A a propor-, tionally lower price. (3) A seller may discriminate in favor of buyer A if he can show that he had to lower his: price in that instance to meet in.

good faith the offer of a competing: seller. Like the Clayton Act, the! Robinson-Patman Act was designed. to be specific concerning one of the general objectives of the Sherman. Act. The Northern Securities Case On the basis of this brief outline of the various antitrust laws, let us proceed to examine how these laws have been int~rpreted and used. I mentioned earlier that one conse quence of antitrust action has been to preserve inefficient competitors to the impairment of competition. In other words, the antitrust laws have been perverted from a supposed charter of economic liberty into a demagogic onslaught against large and successful business with a kind of vote-buying subsidy, not for small business, but for inefficient busi ness. Both historically and doctrinally this process can be traced to a fa mous case involving Messrs. Hill and Harriman-the Northern Securities case. Hill and Harriman, after. what some people called a titanic finan cial war, decided that it would be to their advantage if they merged a couple of railroads running along the northern tier of states out West.

The railroads were the Great North ern and the Northern Pacific. The United States sued under the Sher man Act, charging that this was a violation of both Sections 1 and 2 of that Act-a combination in re straint of trade, and an attempt to monopolize a certain portion of the trade or commerce in the area of the United States that these railroads covered. The decision was close. A majority of one held that the holding com pany violated the antitrust act. Jus tice Harlan, grandfather of the present Justice Harlan, reasoned for the majority along these lines: In prohibiting combinations in re straint of trade, what the Sherman Act intended was to outlaw any im pairment of competition. Though these companies did not compete for 74 per cent of their business, there was an overlap of 26 per cent; and when they decided to merge, that 26 per cent was destroyed. Therefore, there was a restraint of trade within the meaning of the Sherman Act.

Holmes Was Right Justice Holmes, dissenting, rea soned from the fact that the Act does not say that any reduction in the number of competitors is a misde~ 226 THE FREEMAN April meanor; it says that a combination in restraint of trade is a misde meanor. He argued that since the words ((in restraint of trade" were used, the Court ought to follow the meaning generally given those words under common law-the classical theory of interpretation. He was right. The assumption is, and has to be-except in the case of deliberate specification to the contrary on the part of Congress-that the words of any statute are used in the sense of existing law. Holmes went into an exhaustive survey of the relevant common law and pointed out that there was nothing whatsoever in its history to imply that such a merger is a restraint of trade. Holmes further said in effect: The Court must remember that the rule it is making in this case is a rule that must be applied equally to all persons engaged in mergers. If it be said that these two railroads cannot merge because they compete for 26 per cent of their business, one must say that two corner groceries who compete for 26 per cent of their busi ness cannot merge. It would be the same for other persons. Further more, by this case the Court is es tablishing a precedent to the effect that if one of these persons should buyout the other, he is violating the law. Without realizing it, Holmes said, the Court majority is constru ing the Sherman Act as destructive of one of the leading principles of society in this country, that is the free, inalienable right of voluntary asso ciation.

I believe Holmes was right in this case. He was right both as a techni cal legal analyst and in his forebod ings. Establish the premise that vol untary mergers are bad, and you have a basis for challenging normal, common business procedure in an economy based on freedom of con tract. This is the daily fare of busi ness and of capital. If a business feels that its affairs may be more ra tional if it combines with another firm, it merges or acquires assets or stocks of another corporation. And yet, each time this perfectly normal thing is done, the participant~ are in danger of antitrust prosecution. One must recognize the real na ture of the hidden menace here. The fact is that not every merger can be prosecuted. It is a physical impossibility. A market economy could not function if every such ac tion were prosecuted. However, from the point of view of legal science, the resulting situation is very bad. In stead of having a universal rule of law applicable equally to all mem bers of society in free and open com petition, what we have is selective prosecution.

The Political Test What is the basis of selection? There isn't any legal basis for selec tion, and if you haven't a legal non1981 DO ANTITRUST LAWS PRESERVE COMPETITION? 227 arbitrary basis for selection, what is your basis going to be? The answer is perfectly clear. It is going to be political and ideological. And these two things have tended to merge inextricably over the last 40 years or so. There is a great preoccupation with timing ofantitrust prosecutions; suits are brought against mergers when ever the Democrats, or the Republi cans, want to make political hay by showing how rough they are on business. Add to the mix the Marx ian theory that business is bound in evitably to get bigger and bigger un til we are all at the mercy of the exploiting monopolists, and you have two primary qualifications for anti trust prosecution. First of all, it has to be a big business, big enough to scare people. And secondly, the oc casion has to be politically propi tious.

What. is to happen to a country in which success in the market place is to be a signal for prosecution by pol iticians anxious to curry public fa vor? It is a serious question, prompted by the situation which prevails today. Danger of antitrust prosecution threatens any firm that manages to grow and to out-produce its competitors. It would really be a comfort to know that each business was doing its utmost to get as much of the mar ket as it possibly could, that each firm was striving to put out the greatest possible production at the lowest possible cost, that, in short, it was being directed in accordance with the public good. But because of so many interventionist devices, the measuring sticks provided by a free market are no longer available. You can't be sure that a move or a failure to move on the part of a business is dictated by economic considerations in response to the desires of the peo ple.

Prosecutions for Price Fixing Further insight into the absurdi ties and frustrations of the antitrust laws is afforded by review of the prosecutions under the. Sherman Act for price fixing. The famous Morton Salt case dealt with that issue.· And there have been a great many oth ers-perhaps 30 or 40 before the Su preme Court. But what on earth can be the consequence of a judgment that a price-fixing agreement is un lawful? What can anyone do about it if 20 firms have agreed to charge a certain price for a product? As suming that it is a homogene~us product, how can 20 different firms be expected to sell it at 20 different prices? If A charges 98 cents, B a dollar, and Z $1.26, how is Z to gain a sale? The point is that such prosecu tions are nothing but ceremonial po litical promotions of the party line: ((Watchthose businessmen!" We are great at berating the businessman 228 THE FREEMAN April for doing what is as natural to him as breathing. The function of the market is to find the right price, to bring competing goods toward the same price, and to screen out those producers who can't meet the price.

The Cement Institute case illus trates the point. All over the coun try, cement manufacturers were submitting bids that· were identical to five decimal places; and the Su preme Court thought this was in herently incredible without some evil conspiracy. But if this seems incred ible, try to sell cement at as much as a fraction of a cent·higher than com petitors are charging. When cement prices begin showing variations, it will be time to look for collusion and conspiracy. The Law Is Guilty So we find that the Sherman Act itself, the basic antitrust law, has been and is being used, not to pro mote and maintain competition, but to discourage the abler firms from operating to the limit of their abili ties. Add to this the Fair Trade and the Robinson-Patman designs to handicap the larger more efficient merchandisers,and there is no es caping the conclusion that the so called antitrust laws are in fact an ticompetitive and antisocial. They are pushing toward a rigid, inflexi ble' industrial structure which in terferes with the free play of market forces.

Why the Market Works I have already mentioned some important requirements for the functioning of a free society-for the free play of market forces. The right to private property is one. Freedom of contract is another. Beyond these is a need for better understanding of the market process-more faith in it and less fear of it. The market works because of man's desire to make a profit, to get more out than he puts in. Capital formation and use rest on this prem ise. People act in order to better themselves, increase their profits, decrease their losses. And the best opportunity for profit lies in the pro duction of things others want-in service to others. This means that the profit motive is morally as well as economically sound. The free play of market forces also calls for freedom to trade. Free trade policies are the most effective and successful of all possible antitrust actions. Free trade is the best kind of curb on all forms of government intervention, including subsidies to farmers, monetary tricks, or any other interference you could name.

One of the grim features of our day is the great preoccupation with in ternational peace and harmony while at the same time we have the erec tion of all sorts of trade barriers. On the domestic front we glory in the productive accomplishments of the industrial revolution and freely 1981 DO ANTITRUST LAWS PRESERVE COMPETITION? 229 acknowledge the advantages of largE~ scale mass production. But we seeIlll bound to try to stop the spreading of such advantages ·when it com~s to distribution and retailing of these goods and services. Our politicians count noses and find more small re·· tailers than chain store operators" So they enact Fair Trade laws and Robinson-Patman acts deliberately designed as barriers to the develop·· ment of mass distribution methods which could mean better living for all as consumers. Perhaps this sim·, ply reflects a general fear of bigness in business-a feeling that the greater the number of competito~s, the better.

Exclusionby Force A free competitive m.arket is not a. condition which requires for its ex·, istence large numbers of producers. It only requires freedom on the part of all people to produce if and when. they wish. If the unlikely situation. should exist that in a certain line of production a single firm could most economically satisfy the whole mar ket, then, of course, you would have a condition which might be called monopoly. But this is not the aspect of monopoly that people fear. What really disturbs people aboutmonop oly is not that a single person or firm. has control over a commodity but that force, compulsion, or spe cial privilege has been used to keep other people out. Some history is useful here. Mo nopoly became a problem in the An glo-American legal system owing to its origin .. Monopoly originated in crown grants to certain people of ex clusive privileges maintained by the force of government. Queen Eliza beth granted a monopoly in salt, playing cards, and a number of other things. She did this only because she was dissatisfied with the fact that Parliament controlled the purse strings in England. Parliament had .insisted on the exclusive power to tax, but Queen Elizabeth had cer tain ends and aims of her own, and the money needed to attain them came from the persons or groups to whom monopoly powers were granted.

Why MonopolyIs Wrong It's very plain that this situation has nothing to do with the free mar ket, which grants no exclusive fran chise. But the market does not pre clude a monopoly. In fact, monopoly in the purely descriptive. sense and the right of private property are the same thing. Each of us is a monopo list. We ate in exclusive control of our person and all that we legiti mately create. If we legitimately create the best and most efficient or ganization, so productive and so ef ficient that no one else can compete, we have a monopoly in that descrip tive sense. But there is no social harm done as long as· everyone· else· 230 THE FREEMAN April has an equal right to get into pro duction. There can't be any social harm because the social interest lies in the most efficient production of goods. Monopoly in this sense means only that society has achieved that end. One person, one firm, in a free competitive market, has proved to be more efficient than any other.

Anyone else is free to produce, if he thinks he can compete. We have a pretty good example of that sort of thing in the automobile industry in this country. The indus try operates in as free a market as one can have in this imperfect mar ket economy. Unlike some other in dustries, this one is not plagued by an overweeningly jealous attitude toward patents. Anyone can get into it. But more are getting out than getting in. Is something drastically wrong in that industry in the sense that a social harm is being done? It seems to me, if you are fair about it, you would have to say that the big three in the automotive industry are simply better public servants in this line than anyone else. There's quite a difference between monopoly in the descriptive sense of being the only producer, and in the exploitative sense of using force or state aid to exclude competition. The latter is something that free men should fear. And they should know that the government itself is apt to be the culprit behind genuinely an tisocial monopoly.

A UsefulAntitrustAction to Curb Collusion I want to make clear that one phase of antitrust policy is in my opinion of real social utility. That is the phase concerned with secondary boycotts and other predatory op pressive practices which I consider harmful interferences with the free market. Let us assume that 30 or 40 retailers, with a common supplier, have an arrangement to avoid com peting and to split up territories. Along comes an interloper, a true competitor, who wants to buy from the same supplier. If the other re tailers then threaten to quit buying unless the supplier refuses to deal with the interloper, they are held to be in violation of the antitrust law&- and I think rightly so. Though the market eventually would rectify such a situation, sub stantial harm could be done to the interloper in the interim. Also, such collusion might lead to a generally cartelized economy, to everyone's detriment. So I have no objections to antitrust laws as a curb on second ary boycotts and other oppressive action, though I'd prefer that such abusive practices be subject to pros ecution under common law rather than special statute law.

Actually, secondary boycotts are rarely used by businessmen, the most flagrant offenders being the trade unions. However, the unions seem to be immune to prosecution under 1981 DO ANTITRUST LAWS PRESERVE COMPETITION? 231 that single phase of antitrust policy that could be socially useful. A PositiveProgram If I were responsible for preserv ing competition in the United States, I should not tum to the antitrust laws for help. The common law af fords all the legal action needed, and its great merit is that people in sig nificantly similar legal circum stances have to be treated the same way. Politics are excluded. A long step toward preserving or restoring competition in this coun try could be taken by abolition ofthe discriminatory, anticapitalistic, progressive income tax, which skims off the cream of the risk capital takes the ammunition away from the competitors. They can't compete without ammunition, any more than boxers can perform with their hands tied behind their backs. So my plat form would include a plank for re peal of the discriminatory tax laws.

Another plank in my platform to preserve competition in the United States would involve repeal of the laws which have granted so many special privileges and exemptions to labor unions and other pressure groups. In this, I take comfort from the fact that the greatest of all legal scholars, Sir Henry Maine, drew the same conclusion-an elaborate in tricate code of laws is a sign, not of a sophisticated society, but of a primitive society. English law, until toward the end of the eighteenth century, was characterized by a practically solid network of laws regulating the most intimate af fairs, especially when they were eco nomic affairs. There were laws fix ing the amount of flour in bread. A wheelwright couldn't be a wain wright. There were laws against fore stalling, engrossing, and regrating, and so on, and on and on. Someone remarked that forward-looking men toward the end of the eighteenth century and the beginning of the nineteenth century were spending most of their time wiping laws off the books and, as you know, the im petus toward that very helpful form of human conduct was supplied by laissez faire theory.

All people interested in having a free society, I think, should be con cerned with spreading ideas of free dom; let the actual, detailed mea sures take care of themselves, as they inevitably will. The ideas have to come first. The most important thing to a society is that its idea fac tories are really well run. The schol ars, writers, and philosophers of a society have to be good or there is really little hope. How does one bring about a change in the idea factories? I have no answer except that hard one of slow self-discipline, more rig orous and objective pursuit of truth; all the things that take forever. This is mankind's eternal task. i John Chamberlain EXPENDITURES, says Parkinson in his famous Law, always rise to meet income. It is too bad that Parkinson, that canny man, wasn't around way back in 1913 when the progressive in come tax was first adopted in Amer ica. If he had been on the scene, he might have shocked at least a few people into sobriety by observing that his Law, as it applies to govern ment, must be phrased this way: ttThe expenditures of the State al ways rise to meet potential income."