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Armentano in the WSJ, Abolition and Antitrust Fairy Tales …

Leading antitrust critic and abolitionist, Dominick Armentano, has a letter to the editor in the WSJ.  The point of the letter to the editor is rather specific: that FTC’s attack on Intel is no outlier in the historical context of antitrust enforcement, contrary to the WSJ’s description.  To the contrary, Armentano argues that Intel is just another in a long line of misguided enforcement actions.   Here’s the letter:

Your editorial is correct to condemn the Federal Trade Commission’s attack on Intel (“The 100 Years Chip War,” Dec. 18), but it is dead wrong to conclude that the government’s antitrust intervention is “unprecedented” or that antitrust laws really “exist to promote business and price competition.”

Have we forgotten the FTC’s eight-year (1958-1966) campaign against the Borden Co. to stamp out lower prices for evaporated milk? Or its 10-year (1957-1967) legal assault to end the Procter & Gample-Clorox merger in which the FTC’s primary argument against the consolidation was that the probable “economies and efficiencies” of the merger could be passed along to consumers?  Or how about the Justice Department’s 15-year (1953-1968) war against United Shoe Machinery in which United was ultimately ordered to create a competitor with divested shoe machinery assets, license out all of its own patents to the competitor, and then refrain from active competition with the new-born company for five years?

And have we already forgotten that the Microsoft antitrust debacle started with a two-year investigation by the FTC back in 1990 or that the Justice Department pursued the company for another 10 years because Microsoft bundled its Web browser, Explorer, with its Windows operating system, much to the delight of willing buyers. Recall that in the 1999 trial verdict, lower court Judge Thomas Penfield Jackson even ordered the company divested until the D.C. Circuit Court of Appeals unceremoniously discarded that absurdity in 2001. In short, the FTC’s assault on Intel is hardly unprecedented.

What these cases (and hundreds of others) establish beyond any reasonable doubt is that antitrust does not exist to promote business and price competition. Never has, never will. The theoretical and case evidence, some of which I’ve cited, is all the other way.

The real mystery surrounding antitrust is why knowledgeable observers of the free-market process persist in believing this fairy tale.

I’m already on the record as publicly criticizing the FTC’s Intel complaint.  And to the extent the letter makes the general point that the past and present of monopolization enforcement is riddled with false positives and rent-seeking that dissipate any theoretically plausible efficiency gains, I’m on board.  But more generally, I was reminded by the letter of the antitrust abolition argument raised by Armentano and others (generally from Austrian or public choice traditions).  While I’m generally sympathetic to Armentano’s views  in so far as they express skepticism about the welfare benefits of antitrust enforcement, I do not favor the abolition of antitrust and never have.  I should note that I am especially sympathetic to the skeptical view with respect to Section 2 enforcement.  As an antitrust economist who has been highly critical of government intervention in his scholarship — particularly with respect to monopolization rather than cartel and merger enforcement — and who has been described as a “Chicago School apologist” by a sitting Federal Trade Commissioner, I’ve certainly been criticized by those favoring a “reinvigorated” antitrust regime for supporting a reduction in the scope of antitrust laws and a humble and cautious approach to their enforcement.  On the other side, I’ve also frequentlybeen asked why, if I take such a critical view, don’t I support the abolitionist position of Armentano and others who share his views (and criticized by them, see, e.g. the comments to this post)?  Indeed, I might even self-indulgently describe myself as one of the “knowledgeable observers of the free-market process” to whom Armentano ascribes a mysterious and persistent belief in fairy tales.

So why don’t I believe in abolishing antitrust in toto?  The last time the issue came up on the blog was in response to a similar question raised by my George Mason colleague Bryan Caplan (in regard to the new proposed law in Hong Kong).  In that post Bryan asserted:

Even if you’re a mainstream economist who thinks my general critique of antitrust is overblown, you should still grant that for Hong Kong, I’m right. And doesn’t the fact that Hong Kong’s made it this far without antitrust give you a moment’s pause about the domestic benefits of these laws?

My position then is my position now:

Bryan has overestimated the case in favor of abolition, or at least should take a more nuanced stance. In evaluating the social benefits and costs of antitrust enforcement (including rent-seeking, error and administrative costs) I think one really has to distinguish between cartel enforcement, mergers, and monopolization. The evidence that antitrust can generate net benefits in the first category is much stronger than that it is for either mergers or monopolization. Reasonable minds can differ about the state of evidence in those latter categories, as well as whether “real” antitrust enforcement in those categories results in social costs that swamp potential benefits.

Lets just take cartels as an example.  It would be tough to argue, based on the evidence, that there is enough there to support abolition of cartel prosecution.  And cartel prosecution is a substantial part of the modern competition policy landscape.  Nor do I believe that the fact that Hong Kong is a small open economy or that it has gone a long time without antitrust means that cartel prevention is ineffective in the U.S. or cannot be in Hong Kong.  This is not an optimistic or utopian view of antitrust.  I don’t think I’ve ever been accused of that.  I’m written quite skeptically about enforcement in the single firm conduct area and how little we know in these areas should inform our policy.  One can argue that in practice, cartel enforcement really amounts to consumer welfare decreasing activity by overzealous regulators. But thats an empirical question. And I think the evidence pretty strongly suggests that cartel enforcement is good for consumers. The evidence with respect to mergers is a mixed bag and there is no general consensus. The picture is much more bleak with respect to single firm conduct, where not much is known and there is very little empirical evidence to suggest that antitrust enforcement is producing the types of outcomes that would justify the social costs of enforcing and administering those laws.

Bottom line: the position for abolishing antitrust, if we are are basing this on the current state of theory and evidence, is weakest against cartels, uncertain with respect to mergers, and much stronger for single firm conduct.

The interventionists argument that is in theory, since monopolization can result in the same effects as cartels, it doesn’t make sense to prohibit one instead of the other.  Similarly, since a horizontal merger can be a substitute for a cartel agreement, it probably doesn’t make sense to have a cartel prohibition without merger law.  All this is true in theory.  But it does not necessarily follow that these theoretical connections justify adopting the entire antitrust machinery if the welfare losses from merger and monopolization policy exceed the gains from cartel enforcement (including administrative and error costs).  One can argue about the relative magnitudes of those values in theory.  And please note that nothing in such a hypothetical position would require one to believe that anticompetitive conduct doesn’t exist.  But my position is an evidence-based one.   Cartel enforcement, in my view, has largely proven its social value.  But I’m quite skeptical that the technology available to distinguish “single firm” conduct from its anti-competitive counterpart renders Section 2 a consumer-welfare increasing proposition.   In the meantime, in my opinion, the abolitionists’ refusal to confront the qualitative and quantitative evidence supporting the effects of cartel enforcement undermines their case generally, and shifts attention away from the much stronger case against monopolization enforcement.

Posted in antitrust, economics, federal trade commission