'The Myths of Anti-trust' 40th Anniversary

0:00I've been using Dom's book in courses in industrial organization and law and economics for 30 years. And I taught industrial organization at George Mason for seven years, and I used the book. And I kept using it as I went to other universities. And the last time I used it was last semester in a course in law and economics. And I used it as one of the textbooks because I think it's important for students who take these courses to learn the reality of government regulation. It's one thing, you know, most of the textbooks have all sorts of theories of government regulation and there'll be a few footnotes about some study of the effects by some Chicago school economists and that's about it. There'll be a half a paragraph explaining the capture theory of regulation or something like that.

0:49But Antitrust and Monopoly has 55 case studies that apply Austrian economics to the understanding, And that's the lens through which Dom Armantano looked to understand the effects of all these federal antitrust lawsuits. They were all the major federal antitrust lawsuits up to the time he did the research. And in every single one of them, the firms were prosecuted for cutting prices, expanding production, inventing new products, doing all the things that any normal human being would think is competitive. And so it's still relevant, even though he quit, when he quit, and it's still relevant. I still use it. I'm probably going to use it again next semester. I'm teaching law and economics again, so I'll probably use it next semester.

1:37And Roy mentioned to me before the session that what a shame it is that some young Austrian didn't follow through and write the sequel with antitrust cases from 1982 on to the present with a similar format, and that would be a great dissertation for someone to do at a place like George Mason University, if they could just wean themselves away from studying pirates and things like that, and get back to political economy, maybe someday somebody will do it, I don't have high hopes for that though, or the tattoo industry in prison, I think there was a dissertation on that topic too. and so maybe I'll do it if no one else wants to do it someday but it would be a great addition to the literature and you know at my university I teach in a business school and the students can get a BA in economics they can get a BA degree in business economics and now in the last couple years they can get a BA degree in quantitative economics and if Auburn had something similar and added a BA in Austrian economics I think antitrust them

2:51Monopoly would have to be on the curriculum. It would have to be one of the books, if I had anything to do with it anyway. It would certainly be one of the books that should be in any Austrian curriculum. It's the best example I can think of, of the application of real solid Austrian competition and monopoly theory to government regulation. And so that's the way I've always thought of it. And so what I thought I'd do with the rest of my time is mostly for the benefit of the people who are younger than Roy Cordado in the audience and weren't really familiar with this whole arena of what happened with antitrust in the 1980s and into the 90s theory-wise, research-wise, and policy-wise.

3:39In terms of policy-wise, there really was a bit of a revolution during the Reagan administration because some of the head of the Federal Trade Commission was James C. Miller III, who was a student of James Buchanan and Gordon Tullock and Leland Yeager and people of that sort at the University of Virginia when he was a student. And when he took over the FTC, he was familiar with a lot of the critiques of antitrust. I'm not sure he was familiar with Antitrust and Monopoly, Dom's book, but he was familiar with most of the Chicago School research, the best of which was very Austrian in its Orientation, because it was the Chicago School people like Yale Brozin and Harold Demsets at UCLA who challenged the prevailing view at the time.

4:27The prevailing view theoretically was the concentration doctrine. They purported to find a correlation between industrial concentration and profitability. And one of the big home runs that was initially hit by the Chicago schoolers was Yale Brozin Rosen published an article using the same exact data that a Harvard statist, sorry if I'm redundant, had used in some famous studies showing industrial concentration leads to higher profitability on average and then they just assumed that the cause of the higher profitability was collusion. It was always just assumed or they would invent a couple of hundred oligopoly theories to to justify the assumption.

5:16But it was never proven, it was just assumed that that was it. But Brozin took the same data and he said, well look at the profitability of this industry that's supposedly a monopoly in 1960 and then control for the business cycle and see what happens 10 years forward. And of course what he's found was the profitability all descended toward the median and the profitability of the industries at the bottom, the least profitable, tended to ascend toward the median also. and so he found that manufacturing was very dynamic. Well, of course, at any one point in time, somebody's gonna be the best. Somebody has to be at the top, the most competitive. But if you look at competition as a dynamic instrument, like the Austrians do, as dynamic and rivalrous, then this very simple statistical procedure that Yale-Broson did really blew away this whole idea that we can just assume that concentration and Profitability being correlated means there's monopoly power.

6:17And Yale Demsets did something similar. He had the bright idea that, well, you know, the cause of higher profitability in some industries could possibly be economies of scale. It's not necessarily a James Bond-type conspiracy to monopolize a market. And he persuaded a lot of people of that, too. And the point I'm making here is that when the Chicago School did become very successful in criticizing antitrust. It was because they became more Austrian-like and started doing the type of research that Dom did. And the Journal of Law and Economics at the time, published in the 60s and 70s, published a lot of articles doing not as good as Dom Armantano's book, in my opinion, for the most part, but a lot of case studies of antitrust.

7:07In fact, Aaron Director, sort of one of the godfathers of the Chicago School, is purported to have once said that the invention of law and economics as a sub-discipline started with him and a few other people saying, now wait a minute, all this antitrust regulation has been going on for 70 years at that time, lawyers have told us what it's all about. Have economists actually studied and used economics to understand what's going on with Antitrust, and the answer was no, and so the Chicago School took it upon themselves to start applying economics to the understanding of antitrust, so there was a big long trail of research critical of antitrust at the time, and like I said, the best of it is the most Austrian type.

7:55The worst of it, though, and what distinguished them from the Austrians was they always held and a perfect competition as the ideal benchmark, as the ideal, whereas the Austrians don't. That's why it was taboo and still is to this day in Chicago to question the existence of antitrust laws. Because the official story that was told was that there once was a golden age of antitrust. There was rampant market failure, rampant cartelization, rampant monopolization in the late 19th century and government came riding into town on a white horse and saved the day, saved the consumer from the Rapacious Monopolist by Passing the Sherman Antitrust Act. That's the official story. And of course, and so George Stickler himself wrote an article in the Journal of Legal Studies in the 1980s arguing that the Sherman Antitrust Act was a public interest law in the same sense as laws against murder are in the public interest.

8:53And so, and I published an article also myself in the 80s that challenged this. It was called The Origins of Anti-Trust and Interest Group Perspective. And I was motivated by Dom Armantano's research to write this article. After I read his book, the criticisms, even from the so-called free market people in Chicago, like Stigler, they shied away from really direct criticism of Dom's book, per se. But they made the argument that, well, yes, it's gone astray for 100 years, the enforcement of antitrust. But it was a good idea at the beginning, just put smart guys like us in charge, and we'll straighten it all out. That was always the Chicago view. And so that's what Stigler said. Stigler said it's a public interest law, just like the laws against murder are in the public interest. And in this article of mine that was eventually published in the International Review of Law and Economics was an attempt to answer them, because I suspected they were very familiar with antitrust and monogamy.

9:58and I did send it to the Journal of Law and Economics first and Richard Epstein wrote me back and said that he rejected it and the letter said sorry we don't criticize Nobel Prize winners around here that was that's all the letter said there was no substance at all and sort of another way of saying sorry I want to keep my job as editor of the Journal of Law and Economics and so but it did publish it and it's online someplace now it's been cited all over the place over the years this was I think 1984 84 was originally published and and so but what it was motivated like I said by Dom's book to do this because he doesn't start at the origins of the Sherman Act he said it's the enforcement of the Sherman Act that all the case studies are so this was one I want to attempt on my part to answer Stigler and the critics about the golden age because

11:00anyone who has studied political economy and public choice knows that this whole story sounds fishy as can be there. And so anyway, so what I found was I had a research assistant go dig up all the antitrust books that are in the library at George Mason and what she did, we had a big stack in my in my office of all these books. And then step two was, well, what do they say about actual prices and production levels in the 10 years prior to the Sherman Act of 1890? Because all these books say rampant monopolization, rampant cartelization, and that was the justification. And we found that not a single book, either in the law library or the regular library, had one statistic showing prices were going up in general.

11:47Because this was, after all, a period of price deflation. The post-Civil War era was a period of pretty significant price deflation. So just that fact should at least lead you to just question this official mantra of rampant price increases. So I said the next step was, well, let's see if these price data are out there. And so we did our best to using all the government statistics that are available. And in a nutshell, what we found was all the, There was an intermediate step, I had him go look through the congressional record and write down the list of all the industries that were being accused in the congressional arguments of being monopolies. And so we knew who was being targeted. And in a nutshell, I found that those industries, they were all dropping prices much faster than the price level was falling for the 10 years before the Sherman Act and 10 years after.

12:41And they were all expanding production much faster than GDP was expanding. and some of them 10 times faster than the economy as a whole was growing. And so these were the most rapidly growing, innovating, price-cutting industries in the country for 10 years prior to the Sherman Act. And of course, one response that some people made to that was that, well, it was predatory pricing. They cut prices for 20 years and lost money for 20 years in hopes that someday they could make a killing. And that's still a respected theory in mainstream economics, predatory pricing. I call it the unicorn of economic theory because no one has ever seen one, but people talk about it from time to time.

13:27And where the unicorn theory rests now is in game theory. So they'll tell you now, well yeah, no one has ever seen a monopoly created this way, but a game theorist can figure out a game that can show you that it's feasible, that this could happen. of course that's why it's called game theory it's not it's not serious game it's game and so and so that's that's where that stupid theory lies right now and there's probably many dissertations being written about it right at the moment by game theory budding game theorists out there and so and so I thought I did a pretty decent job in blowing that out of the water this this idea this public interest theory of the origin of the Sherman Act and then Don Boudreaux and I I wrote another article about, it was in the Review of Austrian Economics on the protectionist roots of antitrust and it's about the state governments, some of the state governments passed antitrust laws before the federal government did and the same thing happened, they were targeting the price cutters and the most prolific producers at the state level, it was protectionist all the way and this was in the 1880s and so that's out there and it's mostly ignored by the mainstream economists

14:40Of course, they don't want to hear this stuff, but it's out there. And so another thing that was going on at the time in the 80s was that the Public Choice School was doing some pretty good work on antitrust. Bob Tolleson and several co-authors, Bob always had at least five co-authors, for those of you who know Bob Tolleson's work, so it seems. They published an article in the Journal of Law and Economics called about antitrust pork barrel, about how antitrust laws were used as a sort of a hidden form of pork barrel politics by one company getting, sending people to Washington to lobby to block a merger of their competitor because they know the merger of the two competitors would make the two competitors more efficient and more competitive than them.

15:29And so they wrote a really neat article in the JLE about the use of antitrust as a protectionist tool. And so they did some good work. Bill Shugart and Fred McChesney edited a book of readings called The Political Economy of Antitrust. It's all public choice inspired articles on antitrust. But then at the same time, rent seeking was a big part of the research agenda of the public choice school at the time. So they were experts at rent seeking and were experts at being rent seekers within the economics Profession. And one of the examples of being a rent seeker within the economics profession is Tolleson and a few others started writing articles about how, yeah, the cost of rent seeking to society, you know, they apparently thought if they could come up with a really big estimate, like 30% of GDP or something like that, they could become very famous, maybe win a Nobel Prize or something like that.

16:28And so they started saying things like, well, advertising is wasteful rent-seeking, product differentiation is wasteful rent-seeking, mergers are wasteful rent-seeking, because after all, not all of them work out. Some of them don't lead to lower costs, which is true. And so they started publishing a slew of articles, whereas the original idea of rent-seeking in the eyes of Gordon Tullock, who is sort of the modern inventor of the literature in this. It was all about protection and lobbying for protectionist tariffs, lobbying for subsidies. That's the wasteful resources, the lobbying. But now they're saying, no, the free market is wasteful. And so I'm not the only one.

17:15Steve Littlechild wrote a really excellent article in the Economic Journal around 1980 about this. And then I wrote one in the International Review of Law and Economics five years later later, called The Domain of Rent-Seeking Behavior, Private or Public Choice, where I pretty much laid out the Austrian view of competition and explained why you should not include advertising, product differentiation, mergers as wasteful rent-seeking. And Dennis Mueller, who at the time was the president of the Public Choice Society, even wrote an article in the Journal of Economic Literature saying that there should be new to determine which types of R&D should be allowed because he thought some types of R&D were just sort of a sneaky rent-seeking.

18:01And so imagine the rent-seeking that would go on if you had a congressional committee that could ban your competitors' R&D spending. And so that tells you the quality of some of the literature that ends up in the so-called Journal of Economic Literature. and so and but but this this again this all this personally it was it was inspired by Dominic Armatano's book because I was always interested in I.O. it was one of my interests in graduate school and then and I thought well this is this is just a model piece of scholarship it applies good solid Austrian theory to to government policy regulation antitrust policy and and we We need a lot more of that, for sure, and one sort of footnote type of thing I did along these lines was my article called The Myth of Natural Monopoly, in which I questioned this whole idea, the whole story that's in the textbooks, that economies of scale arose and created monopoly in the free market, and somehow the government rode into town on a

19:09and the White Horse Again and Saved Us from Monopoly. Never happened that way. The governments created the monopoly and then economists invented a theory to justify it. And you can read my article for that if you want. And the final article that was along these lines that I wrote was co-authored with Jack High in the Economic Inquiry in 1988. It was called Antitrust and Competition Historically Considered. And we surveyed every economist in the late 19th century who wrote anything about competition and antitrust. And it was a small club back then. So you were able to survey the entire population of professional economists. And it wasn't unanimous, but I think there was one dissenter. But it was almost unanimous that they were opposed to antitrust regulation in principle.

19:56They thought it was inherently incompatible with marketplace competition. They weren't critics like Chicago schoolers. They didn't say, put smart guys like us in charge, and we'll fix it. They thought the whole idea was inherently incompatible. And that, of course, is the same way in which a lot of Austrians think about it. And so I don't know if any of this will have any effect on anybody or anything ever. I'd like to think so sometime. But it was all inspired by the model of Dom Armantano as a scholar. And my time is up. Thank you very much.