How Capitalism Will Save Us (43 page)

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e’ve already discussed why, in a free-market economy, competition laws aren’t needed. Sooner or later, natural forces of creative destruction undermine even the biggest players in a market. Unfortunately, free-market opponents have for generations failed to appreciate this basic Real World principle. This failed understanding has given us largely unnecessary and highly destructive antitrust laws.

Since the Sherman Antitrust Act of 1890, Congress has enacted laws ostensibly designed to ensure competition and protect consumers. They have resulted in antitrust actions or investigations—and often massive penalties—against companies ranging from the old Standard Oil and U.S. Steel to IBM, Microsoft, Staples, Toys “R” Us, and others.

Public antitrust debates generally center on whether the activities of a corporate giant—say, a Wal-Mart or a Google—are “anticompetitive” and deserve antitrust intervention. Take the widely debated Microsoft case, the most celebrated antitrust action in recent history. Some company supporters argued that government action wasn’t needed, because high tech, with its ever-emerging new technologies, was a new competitive game. Microsoft was therefore different from early antitrust cases, such as Standard Oil, that involved low-tech marketplaces for more limited resources. Therefore, the argument went, Microsoft was not deserving of the antitrust prosecution inflicted upon those early industrial “monopolies.”

But this skirts a far bigger question: were the Sherman Act and other early competition laws truly needed in the first place? Historians and economic and legal experts are now saying that the nation’s earliest antitrust laws and court cases were then, as now, totally unnecessary—and economically destructive.

Ostensibly, antitrust laws are intended to preserve competition and to protect consumers from being harmed by overly powerful, monopolistic companies. But were the targets of those classic antitrust actions really hurting consumers? In other words, were they behaving as monopolies?

Antitrust historian Dominick Armentano examined fifty-five of the most famous antitrust cases in U.S. history. He found that the targets of classic antitrust actions rarely, if ever, could be considered monopolies. Armentano cites the classic case of Standard Oil of New Jersey, whose growth through mergers caused it to be broken up in 1911 by the government.

Other supposed monopolies targeted in classic cases included IBM, which at the time had about 65 percent of the mainframe computer market. In the early 1960s, the government also ruled that Brown Shoe Company would become a monopoly if it acquired Kinney Shoes. But the two companies together would have had a 2 percent market share, a far cry from monopolistic dominance.

Were these goliaths hurting consumers? Far from it. Armentano says that in every single case, companies had been dropping prices, innovating, and expanding production. If there was any “harm” done, it was to less efficient competitors.

Standard Oil, for example, had been accused of controlling the market for kerosene. Yet kerosene prices during the period of supposed monopolization actually
fell
—from thirty cents a gallon in 1869 to about six cents a gallon at the time of the trial.

In the 1930s and 1940s, the Aluminum Company of America (ALCOA) was the subject of a thirteen-year-long antitrust case. What had the company done? Developed refining methods that had
lowered
aluminum ingot prices. Another target, the old American Can, was accused of “coercing” companies into signing long-term leases by offering attractive, generous price discounts for large orders of its cans.

Armentano and others say the classic antitrust cases weren’t needed to protect consumers any more back then than they are now. The early cases, like most today, were brought about by a group of large competitors hoping to use the government to protect or enhance their interests. Economists have a term for this: rent seeking.

In the case of the Sherman Act, rural cattlemen and butchers hoped to use the law as a way to reduce the pricing power of the big meat packers in Chicago, whose size gave them immense power to negotiate lower shipping prices. Meanwhile, the Standard Oil antitrust case produced what Dominick Armentano has called a “government sanctioned cartel in oil”—a marketplace where players and pricing had to meet the approval of Uncle Sam.

In the case of American Can, the judge actually forced the company to raise its prices in order to help less productive, higher-priced competitors. None of these outcomes could be said to help consumers.

What antitrust true believers fail to appreciate is that, as we explained
in
chapter 2
, even the biggest market players fall prey to new competition and marketplace creative destruction—often from unexpected quarters.

Government tried—and failed—to break up the mammoth U.S. Steel in another classic case in 1911. The free market did the job instead: the company’s once-immense “market power” was gradually whittled away by competitors—not just by other steel makers but by alternatives like aluminum. U.S. Steel once made 67 percent of the steel produced in the United States. Today it produces only about 10 percent. Competition from foreign firms in countries like Japan and South Korea cut into the company’s market share. New domestic competition came from so-called minimills, such as Nucor, which made steel from scrap.

The irony of antitrust is that the economy’s only genuine monopolies are imposed or created by government. Think Fannie and Freddie, your local cable company, or, for those old enough to remember, “Ma Bell”—the old AT&T. Entities such as Medicare, the government’s health insurer, have a far greater ability to set prices and eliminate competition than any antitrust target in the private sector. When a company does these things, it’s accused of being “anticompetitive.” But when government does them, it’s ostensibly “a public good.”

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hat’s wrong with a law requiring that unskilled workers get a decent wage? This question has long evoked intense and heated debate. The late senator Ted Kennedy, for one, went so far as to argue that a government-mandated minimum wage was no less than

No doubt, emotional appeals like this can be persuasive. They’re one reason that 90 percent of nations have instituted some kind of minimum wage. The problem is that studies have shown that a minimum wage does not help the poor in the Real World. Instead it increases joblessness among unskilled people.