Thursday, March 02, 2006

Book Review: The Abolition of Antitrust

NB: This review is by Gideon Reich and is the second installment in CAC's new "Capitalist's Book Club" series.

If there is one alleged shortcoming levied at capitalism about which there is little controversy, even in many allegedly pro-free market circles, it is the claim that unregulated markets allow the formation of coercive monopolies. In answer to the supposed concentration of economic power by businessmen, proponents of government intervention in the economy created the antitrust laws--laws which Justice Thurgood Marshall, speaking for the majority of the United States Supreme Court in United States v. Topco Associates claim serve as the "Magna Carta of free enterprise." Today, too few would dispute Marshall's claim.

The supporters of antitrust law argue that allowing companies to compete freely in the market is an injustice to the consumer, resulting in higher prices, as well as being obviously to the detriment of other competitors. These supporters claim that unregulated market competition was already tried in the 19th century and that it led to the evil of the so-called "Robber Barons." Even economists point out that monopolists destroy "perfect competition" and are thus able to earn so-called "monopoly profits."

Hence it is hardly surprising that when the lay proponents of laissez faire suggest that the antitrust laws ought to be repealed, they encounter a barrage of varied objections and may not have the necessary specialized knowledge to answer the various criticisms with which they are presented. Thanks to Professor Gary Hull, director of the Program on Values and Ethics in the Marketplace at Duke University, there is now a source which contains the detailed answers to the economic, legal, and philosophical objections one is likely to encounter.

The choice of "Abolition" in the title of this book is a powerful inclusion--it seeks to place the repeal of antitrust on the same moral ground as the repeal of slavery during the American Civil War. Accordingly, the arguments presented in The Abolition of Antitrust are a taut integration of law, economics and morality. As such, this book will be anathema to any who see no connection between values and economics because The Abolition of Antitrust serves as both a primer and as a call to arms.

The Abolition of Antitrust includes essays by Dominick T. Armentano, Richard M. Salsman, Eric Daniels, Gary Hull, Harry Binswanger, Thomas Bowden, and John Ridpath, covering topics as diverse as the history of America's views on monopolies (Daniels), profits as viewed by the economists (Salsman), as well as detailed arguments as to the immorality of antitrust (Binswanger and Hull) and several others as well.

One of the most fascinating essays in the book is the one by Richard Salsman. Entitled "The False Profits of Antitrust," it recounts the two hundred year history of economists' inability to understand the nature and source of profits. Profit, Salsman argues,

...has been falsely characterized as theft from manual laborers (or consumers) due to improper "market power," as some transitory residual reflecting "market failure" or a consequence of dumb luck. Tragically, false theories, of profit have become an integral part of the pseudo-intellectual, Byzantine edifice of antitrust law. Since the law rests of false theories, it necessarily assaults genuine market competition, restrains free trade, and penalizes legitimate business gains. (p.27)
Salsman goes on to describe how the economics profession completely misunderstands profits, partly as a result of its insistence on fictional idealized models of market place operation such as the "perfect competition," which according to Salsman, "asserts that profits and entrepreneurs are (or should be) dispensable." Surprisingly, Salsman also criticizes the usually pro-capitalist Austrian school of economics for its inadequate views on the nature of profits:

For most Austrians, profits are not created but "captured"-as one might secure a ransom by a hostage taking. Accepting the false view that markets in equilibrium do not generate profits--yet looking favorably upon profit and sensing that it has something to do with entrepreneurial motivation-Austrians have been left to conclude that markets are in a perpetual state of disequilibrium, that they do not clear, and that entrepreneurs or capitalists do not create profit but, through their arbitrage activity, inevitably eliminate it. (p.46)
In his essay, Salsman proceeds to defend the profits of capitalists and argues that companies which achieve consistently large profits-the typical targets of antitrust legislation-are unjustly persecuted.

It is no surprise then that Salsman's chapter has sparked deep controversy among economists, one even going on to claim that he "[didn't] know of any economists who consider the perfectly competitive model relevant to antitrust analysis" nor knew of any economists "in the past century at least, who would characterize entrepreneurs as 'robber barons.'" Apparently, this commentator has never sat though an undergraduate course in economics or has ever read a Paul Krugman column in the New York Times.

In Editor Gary Hull's essay "Antitrust is Immoral," Hull describes the inspiring but tragic history of the DuPont Company. According to Hull, the story of DuPont's extensive production and marketing efforts of cellophane shows business acumen at its best:

DuPont realized that cutting-edge chemistry and state-of-the-art manufacturing facilities were, by themselves, insufficient to create wealth. The company grasped that it need to educate potential customers about the virtues of cellophane. It needed the same creative thinking, the same purposeful plan and productive prowess in marketing and sales that were employed by its scientists and engineers. Tragically, the company's successful marketing would soon unleash the hounds of trustbusters. (p.151)
As a result of its achievements, DuPont was "persecuted and prosecuted." Hull writes that

After World War II, the company wanted to expand its production of cellophane to meet growing demand-a demand that the company had created. Then trustbusters alleged that DuPont "monopolized" the cellophane market and that it had "effective market power"--which is described loosely by defenders of antitrust as the ability to raise prices or exclude competition. Fearful of providing the government with "evidence" of a "crime," DuPont cancelled its expansion plans and was compelled-by the threat of the government's suit-to build a cellophane plant for one of its competitors, Olin Industries. (p.153)
In his essay, Hull identifies altruism as the fundamental moral premise behind the throttling of businessmen through the antitrust laws. Altruism, Hull points out, "does not mean kindness of consideration" but instead that "others-whether society, God, or the state-have a first claim on anything you consider a value, be it your money, property, time, effort, or life." Following the morality of altruism, antitrust's proponents argue that the successful businessman must sacrifice for the unsuccessful--or else. Hull concludes that the abolition of antitrust requires the rejection of altruism and the adoption of rational egoism as an intellectual prerequisite.

The scope and power of antitrust legislation is mind-boggling. Antitrust prosecution and intimidation has included everything from ice cream, to software, to telecommunications, to grocery stores, pharmaceutical companies and individual small-businessmen. To ferment a resistance that one day will lead to antitrust's repeal, it is crucial to challenge the moral, economic and legal premises of the proponents of this unjust law. The Abolition of Antitrust offers powerful intellectual ammunition for those who would choose to fight this battle for justice.

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