Although most economists today favor stricter antitrust regulation, from the 1880s until the 1920s the economics profession expressed nearly unanimous opposition to antitrust. When Sanford Gordon surveyed professional journals in the social sciences and articles and books written by economists before 1890, he found, “A big majority of the economists conceded that the combination movement was to be expected, that high fixed costs made large-scale enterprises economical, that competition under these new circumstances frequently resulted in cut-throat competition, that agreements among producers was a natural consequence, and the stability of prices usually brought more benefit than harm to the society. They seemed to reject the idea that competition was declining, or showed no fear of decline.” 1
George Stigler has also noted economists’ initial disapproval of antitrust: “For much too long a time students of the history of antitrust policy have been at least mildly perplexed by the coolness with which American economists greeted the Sherman Act. Was not the nineteenth century the period in which the benevolent effects of competition were most widely extolled? Should not a profession praise a Congress which seeks to legislate its textbook assumptions into practice?2” Stigler offered three possible explanations. First, economists did not appreciate the importance of tacit collusion. Second, they had too much confidence in other forms of regulation as a means of dealing with monopoly. Third, they underestimated the income they would receive as antitrust consultants.
These explanations are plausible, but there may be an even more important reason for the transformation of economists’ attitudes toward antitrust. In the late nineteenth century most economists viewed competition as a dynamic, rivalrous process, similar to the theory of competition embodied in the work of Adam Smith and today’s Austrian economists. Consequently, they tended to regard mergers as a natural consequence of the competitive struggle and not something that should be interfered with by antitrust legislation. 3Although some industries were becoming more concentrated in the late nineteenth century, rivalry was still as strong as ever, as the rapid expansion of output and the decline in prices attest. Thus, the economists of the time saw no reason to interfere in market processes with antitrust regulation.
Beginning in the 1920s, mathematical economists developed the so-called perfect competition model, and it replaced the older theory. To economists competition no longer meant rivalry and enterprise. Instead, it meant the equation of price and marginal cost. Most important, it meant that there must be “many” firms in “unconcentrated” industries. Once economists began to define competition in terms of market structure, they became more and more enamored with antitrust regulation as a way of forcing the business world to conform to their admittedly unrealistic theory of competition.
Economist Paul McNulty has noted: “The two concepts [of competition] are not only different; they are fundamentally incompatible. Competition came to mean, with the mathematical economists, a hypothetically realized situation in which business rivalry … was ruled out by definition.”4. F. A. Hayek has made an even stronger statement: “What the theory of perfect competition discusses has little claim to be called competition at all and … its conclusions are of little use as guides to policy.” 5 Moreover, wrote Hayek, “If the state of affairs assumed by the theory of perfect competition ever existed, it would not only deprive of their scope all the activities which the verb ‘to compete’ describes but would make them virtually impossible.” Advertising, product differentiation, and price undercutting, for example, are all excluded by definition from a state of “perfect” competition which, according to Hayek, “means indeed the absence of all competitive activities.”
Those economists who use market structure to measure competition are likely to have a favorable attitude toward antitrust regulation. Stigler asserted more than 30 years ago, “One of the assumptions of perfect competition is the existence of a Sherman Act.”6 To the nineteenth-century economists, however, an antitrust law was incompatible with rivalry and free enterprise. The perfect competition model and its corollary, the structure-conduct-performance paradigm of industrial organization theory, have seriously misled the economics profession, at least as far as antitrust policy is concerned.
The two principal reasons for the “antitrust economists’ paradox,” then, are the lack of historical knowledge–particularly about actual economic events in the late nineteenth century–and the failure to appreciate that competition is best viewed as a dynamic discovery procedure, as Hayek contends. Economists who believe that there was once a “golden age of antitrust” have never produced any evidence of such an age. As this paper has shown, the Sherman Act was a tool used to regulate some of the most competitive industries in America, which were rapidly expanding their output and reducing their prices, much to the dismay of their less efficient (but politically influential) competitors. The Sherman Act, moreover, was used as a political fig leaf to shield the real cause of monopoly in the late 1880s- protectionism. The chief sponsor of the 1890 tariff bill, passed just three months after the Sherman Act, was none other than Sen. Sherman himself.
In the late nineteenth century most economists viewed competition as a dynamic, rivalrous process, much like the contemporary Austrian theory. Accordingly, they nearly unanimously opposed antitrust on the grounds that such a law would be inherently incompatible with rivalry, Once the economics profession embraced the “perfect” competition theory which, as Hayek has said, means “the absence of all competitive activities,” it also embraced antitrust regulation. For once competition came to mean “many” firms and the equation of price to marginal costs, rather than dynamic rivalry, most economists became convinced that antitrust laws were needed to force markets in the direction of their idealized model of “perfect” competition. Consequently, antitrust has for over a century been a tremendous drag on competition, rendering American industry less productive and less competitive in world markets. Robert Bork might not have been exaggerating when, writing in his book, The Antitrust Paradox, he remarked that if government were to somehow force the economy into “competitive equilibrium,” it would have approximately the same effect on personal wealth as several strategically placed nuclear explosions.
Excerpted from The Truth About Sherman
- 1.Sanford Gordon, “Attitudes Toward the Trusts,” p. 158.
- 2.George Stigler, “The Economists and the Problem of Monopoly,” American Economic Review (May 1982): 1
- 3.The following discussion is based on T.J. DiLorenzo and Jack C. High, “Antitrust and Competition,” Historically Considered,” Economic Inquiry (Summer 1988).
- 4.Paul McNulty, “A Note on the History of Perfect Competition,” Journal of Political Economy (August 1967): 398
- 5.F.A. Hayek, “The Meaning of Competition,” in F.A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), p. 92.
- 6.George Stigler, “Perfect Competition, Historically Contemplated,” Journal of Political Economy (February 1957): 1.