Note: Read Part I of this essay here.
Dominick T. Armentano presents the substance his critique of antitrust laws in Chapter 2 of Antitrust: The Case for Repeal(1999).
Armentano notes that the barriers to entry approach toward competition – which underlies many antitrust laws – has been discredited by the economics profession during the 1980s and 1990s – especially with respect to barriers to entry that come from firms’ cost advantages. The application of barriers to entry doctrine to antitrust laws has led to the more efficient producers being shut out of the market. That is, the very firms that have benefited consumers the most through their innovations have often been the victims of antitrust prosecution. If antitrust laws are intended to provide any kind of consumer benefits, then it is perverse to continue to allow the persecution of the most effective producers. Antitrust has often been directed against intense cost competition, even though consumers greatly favor the activities of firms that decrease prices and increase output.
Armentano further argues that even though the enforcement of antitrust law has improved over the last three decades, the laws still remain on the books and there exists the danger that the much stricter traditional enforcement will return in the future.
Eight Reasons for the Repeal of Antitrust
Armentano gives eight primary reasons to repeal all antitrust laws.
1. Antitrust laws misconstrue the fundamental nature of competition and monopoly. They altogether neglect the Austrian economic view that competition is a constantly unfolding discovery process, not a static situation and that competition is characterized by intense rivalry among competitors. The applications and extensions of antitrust laws have been based on the static and unrealistic perfect competition theory, which fails to account for the real workings of market. In antitrust enforcement, market share has usually been taken as an indication of market power, but – following Murray N. Rothbard – market share is in fact an indication of market efficiency. A firm’s high market share is the result of its superior competitiveness, not the cause of its market power.
2. Antitrust laws have served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors. In the past, the laws have tended to protect competitors at the expense of the process of competition.
3. Some antitrust laws explicitly intend to restrict price competition. The Robinson-Patman Act of 1936 is a major example of this. Ultimately, antitrust laws fail to recognize that all competition will lead to some firms going out business, but this does not imply a lessening of competition or a diminution of the competitive process. Price competition is the primary way in which consumers benefit; why have laws such as the Robinson-Patman Act which explicitly limit it by restricting price discrimination?
4. Section 7 of the Clayton Act, which restricts mergers, may inhibit the flow of capital into the hands of more efficient managers. Mergers often increase the efficiency of merging firms by taking advantage of economies of scale or channeling resources into the hands of more efficient managers. For instance, hostile takeovers of publicly traded firms – which are mergers by definition – happen because the managers of the firm that undertakes the takeover believe that they can run the firm better than it is currently being managed. The rising stock prices of the firm that is being taken over indicate that the firm’s owners and investors agree with this evaluation. It is, of course, impossible to anticipate with certainty whether a merger will improve efficiency or not – but government officials are far less competent at judging this than the actual market participants.
5. Antirust is a form of government regulation, which makes the economy less efficient. Armentano further approaches antitrust from the perspective of the Capture Theory of Regulation, which implies that antitrust laws would be “captured” by the producers of the regulated industries, who would then attempt to use the laws to erect barriers to entry and place otherwise superior competitors at a disadvantage.
6. Antitrust enforcement suffers from the Hayekian Knowledge Problem. Can the courts and the antitrust officials have access to sufficient knowledge about the benefits and costs of all the actions regulated by antitrust laws? Answering this in the affirmative entails an enormous presumption of knowledge that is virtually impossible for any human being to obtain. Furthermore, there is no reason why any judge would have superior insight to that of the actual market participants, who are continually trying to act on as much knowledge as they can possibly obtain. It is much easier for market actors in the particular market situations to coordinate their actions, as they are aware of many of the circumstances of time and place that antitrust authorities cannot possibly know. Even the market participants themselves often do not have complete information and must use their judgment, but remote, detached judges and antitrust officials cannot do even this nearly as well as actual market actors.
In essence, we have in antitrust a form of economic planning, not far from the comprehensive industrial planning that characterized many fascist economies in the past. The market discovery process is often prevented by the antitrust laws.
7. Antitrust laws interfere with basic property rights. For instance, all mergers are buy/sell transactions among consenting parties, each using only its own property. Antitrust laws prevent these basic mutually voluntary and advantageous transactions. The laws tend to be arbitrary in their statements and in their enforcement, making it impossible for individuals and firms to be certain that they have the right to use their property in a wide array of ways. Not only is antitrust enforcement inherently arbitrary, but legal precedents have repeatedly been overturned and inverted throughout the years.
8. Any progress regarding antitrust laws to date has only been administrative. No new laws have been passed that overturned existing laws and approachedmarket competition in a more reasonable manner. Rather, there has simply been a change in interpretation of existing laws – but this interpretation can easily revert back to a more traditional form in the future.
Three Views of Antitrust Laws
Armentano continues his analysis by exploring three common views of antitrust laws and why they prevail.
View 1: Antitrust as Public Interest. Those who hold this view see antitrust laws as protecting the interest of consumers by promoting competition. Most people who have not thoroughly studied antitrust theory and cases believe this claim. As most Americans are convinced that competition is a good thing, they are willing to support laws that claim to promote it.
But there exist two problems with this view. First, the models of competition and monopoly on which antitrust laws are based – such as the Neoclassical perfect competition and free-market monopoly models – are incorrect. Thus, the laws stem from a flawed understanding of what competition is.
Second, the actual behavior of the firms that have historically been prosecuted under antitrust laws has been highly competitive. Antitrust laws have tended to punish the firms that helped consumers the most. Thus, antitrust laws are destructive of the very competition that it is in the public interest to preserve.
View 2: Antitrust as Regulation. If antitrust laws are indeed a form of regulation, then they suffer from the Public Choice problems that accompany all forms of regulation. Thus, it will be extremely difficult to get rid of these laws, since numerous powerful special interests benefit from them. There indeed exists strong evidence that this view is correct.
View 3: Antitrust as Industrial Policy. The United States government ostensibly does not have an overarching industrial policy – which is a unique aspect of fascist economies. But antitrust laws function as a kind of piecemeal industrial policy whereby government officials can decide which mergers can or cannot take place, which prices can or cannot be charged, and which products can or cannot be sold. Any kind of centrally planned industrial policy – be it partial or comprehensive – suffers from the Hayekian Knowledge Problem. This view also has substantial evidence supporting it and is fundamentally compatible with View 2 above.
Pongracic, Ivan. Second Lecture on Armentano’s Antitrust: The Case for Repeal. Hillsdale College. Hillsdale, MI. December 4, 2007.
All lecture material is used with explicit permission.