The Curse of Bigness: Antitrust in the New Gilded Age

by Tim Wu

Rejecting laissez faire’s rule by the wealthy, communism’s dictatorship of the proletariat, and fascism’s state-directed economy, the West took a different path—the re-democratization of economic policy and a politics of wealth redistribution. That path yielded decades of economic growth that built middle classes, and saw a level of prosperity previously unknown to human history, reducing what had become a massive gap between rich and poor. As such, the economic achievements of Western democracies stole the thunder of both communism and fascism, whose calls for revolution were always driven by the unfairness and cruelty of unfettered capitalism.

By the late 1960s, the share of national income going to the top 1 percent of earners had fallen to 8 percent, a far cry from the extreme inequality of the 1910s and 1920s.

The first is the reemergence of an outrageous divide between the rich and the poor. This trend is most stark in the United States, where the top 1 percent today earn 23.8 percent of the national income and control an astonishing 38.6 percent of national wealth.

It would be an exaggeration to suggest that antitrust provides a full answer to either inequality or other economic woes. But it does strike at the root cause of private political power—the economic concentration that facilitates political action. Advocating antitrust revival is not meant to compete with other economic proposals to address inequality. But laws that would redistribute wealth are themselves blocked by the enhanced political power of concentrated industries. In this way, the structure of the economy has an underlying influence on everything in the realm of economic policy. If antitrust is not the solution, it, historically, has been part of the solution, meriting a new look at what it can do.

From the late nineteenth through the early twentieth century, the United States came under the grip of a powerful political and economic movement whose influence spread across the world and persists today. Known in its time as the Trust Movement, it called for the reorganization of the American and world economy into a new form: the giant, monopoly corporation. It achieved that goal with leviathans like Standard Oil and AT&T in America, I.G. Farben in Germany, and with the domination of the Japanese imperial economy by the zaibatsu system. In its American form, the Trust Movement envisioned an economy with every sector run by a single, almighty monopoly, fashioned out of hundreds of smaller firms, unfettered by competitors or government restraint. In short: pure economic autocracy.

The American Revolution itself was in large part sparked by the abuses of Crown monopolies.

As Alexis De Tocqueville observed, “Among the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of condition among the people.

Brandeis saw an economy dominated by giant corporations as tending to a certain inhumanity. He feared that working in a giant corporation might rob the American people of their character: “far more serious than even the suppression of competition is the suppression of industrial liberty, indeed of manhood itself.”

Seems misguided in modern times when the biggest companies like Google and Facebook are often regarded as some of the best employers.

Olson’s memorable conclusion is that the small and organized will dominate the large and disorganized.

Concentrated industries have good reasons to invest political influence. Consider, by contrast, the problem of collective action that faces “the middle class,” a large group with some 100 million members. A middle-class tax cut might save each member $500 a year. However, it might also require someone to invest $50 million to lobby and ensure passage of that tax cut. As the math makes clear, there is no individual member of the middle class that has the incentive to make that investment. Even if it were just a $20 million lobbying price tag, there would still be no investment. This is the problem of collective action, and it predicts that large groups—the majority—will often be losers in the legislative process.

Great point

Rockefeller liked to offer his smaller rivals the choice first popularized by Genghis Khan: Join the empire, or face complete destruction.

“A man always has two reasons for the things he does,” Morgan once told an associate. “A good one and the real one.”

Roosevelt, just before pulling the trigger, summoned Standard Oil’s leadership to the White House for a secret meeting. There he put a different option into consideration: Might the world’s largest oil company be willing to accept government oversight, promise to clean up their act, and even, perhaps, become the first “public” trust? This offer reflected the fact that Roosevelt’s primary concern was not so much decentralization, but the supremacy of elected government.

Standard Oil was broken into its constituents parts, among them seven “majors,” many of which remain among the most valuable and powerful firms on Earth, including, notably, Standard Oil of New Jersey (Exxon), Standard Oil of New York (Mobil), and Standard Oil of California (Chevron). In the aftermath of the breakup, stock was divided proportionately, and, to the surprise of many observers, within a year, the value of what had been Standard Oil had doubled, and in several years, had increased five-fold.

As business tycoon T. Boone Pickens once put it, “It’s unusual to find a large corporation that’s efficient. I know about economies of scale and all the other advantages that are supposed to come with size. But when you get an inside look, it’s easy to see how inefficient big business really is.”

President Kennedy’s antitrust chief, Lee Loevinger, would testify before Congress as follows: “The problems with which the antitrust laws are concerned—the problems of distribution of power within society—are second only to the questions of survival in the face of threats of nuclear weapons.”

Hitler’s rise and exercise of power were facilitated by the German Republic’s tolerance of monopolies in key industries, including the Krupp armaments company, Siemens railroad and infrastructure, and, most of all, the I.G. Farben chemical cartel. As a report by the Secretary of War concluded: “Germany under the Nazi set-up built up a great series of industrial monopolies in steel, rubber, coal, and other materials. The monopolies soon got control of Germany, brought Hitler to power, and forced virtually the whole world into war.” That conclusion came from the observation that the main German monopolists, over the 1930s, threw their weight behind the Nazi regime when it lacked support among other key groups, and that each ultimately became deeply allied with and enmeshed in the German war effort.

This is a very big conclusion that I would like to know more about

However, a new intellectual opposition to antitrust was brewing, in a different form than before, and in an unexpected place. It formed at the University of Chicago, the school founded by John D. Rockefeller, and in the person of a professor named Aaron Director, and a particularly brilliant student of his named Robert Bork.

Bork’s signal contribution was this. He took Director’s “consumer welfare” idea—that antitrust was intended only to lower prices for consumers—and argued that it was not merely what an economist like Director thought the law should do, but that it had been, all along, the actual intent of the laws.

As Herbert Hovenkamp, today’s reigning dean of antitrust doctrine, puts it: “Bork’s analysis of the legislative history was strained, heavily governed by his own ideological agenda.… Not a single statement in the legislative history comes close to stating the conclusions that Bork drew.”

Most important was the idea that grounds much of this book: that antitrust represented a democratic choice of economic structure and a check on the political and economic power of the monopolies.

Bork offered a calming remedy, with an appealing simplicity and apparent rigor. For Bork’s antitrust economics are easy—not easy enough for a schoolchild, but easy enough for a lawyer who does not specialize in antitrust and is looking for a dignified and respectable manner in which to decide, or get rid of, a hard case. The simple question that Bork posed for every doctrine was this: Does it clearly prevent harm to consumers? Have you proven it? Or might there, plausibly, be an economic explanation that doesn’t imply harm, and if so, what is it?

In the year 1974, AT&T was the largest firm on the planet, the employer of over a million people, and the uncontested holder of a monopoly that had, by then, lasted a full six decades.

But perhaps the strongest counterexample is Japan, which, by the 1980s, was considered a serious rival to the United States in technology industries such as computing and online services. But because Japan never broke the power of its telephone monopoly, independent telecommunications and internet firms never really grew, and by the early 2000s the United States had leaped far ahead. There is, after all, only so much you can do when your innovations need to be engineered not to disturb the mother ship.

I think there is a pretty strong counterpoint to be made here that if other companies allow monopolies, it can give them more financial firepower in a global economy to purchase innovative startups. If the US is the only country breaking up monopolies and others are being propped up this could be a problem as firms become more and more global.

From the beginning, Microsoft had proven the mantra that good artists copy but great artists steal. Its first operating system (MS-DOS) was actually a clone of CP/M, another operating system.* Microsoft Windows was a rip-off of the Apple Macintosh operating system; Microsoft Word and Excel were copies of Wordperfect and Lotus 1-2-3, respectively. In no instance were Microsoft’s products actually better in a clear way—instead, they were always bundled with something else you really needed. Microsoft’s products never won by choice, but rather, by the sense that there was no real choice.

Jumping from theory to reality in a novel way, the Chicago School then asserted that that which did not exist in theory probably did not exist in practice. Robbing banks is economically irrational, given security guards and meager returns; ergo bank robbing does not happen; ergo there is no need for the criminal law. Exaggerated only slightly, this premise has been at the core of Bork-Chicago antitrust for more than thirty years.

If one wanted to mark a point as the fall of Brandeisian antitrust, it would be 2004, when the Supreme Court, under Justice Antonin Scalia, elevated what was once called “the evil of monopoly” to something different: an essential motivating factor within the American economy. In an unnecessary aside, Scalia wrote: The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.

The airline industry, which had been deregulated in the 1970s with the goal of increasing competition, was allowed to merge into an increasingly smaller number of “major” airlines. Delta bought Northwestern airlines; United bought Continental, and American bought U.S. Airlines, reducing the total number of traditional major airlines to just three. Since then, the airlines have found it easy to cooperate on matters like the shrinking of seats or the introduction of new fees, yielding unprecedented profit for years on end.

The airline industry was previously unprofitable and required consolidation to be viable. "Unprecedented profit" should say "profit at all".

Cable was also freed to charge monopoly prices, and happily raised monthly prices at some eight times the rate of inflation. During a period of historically low inflation, it managed to raise its prices by an impressive 8 percent per year. Bills that were once in the $30–40 range rose over $100, and as much as $200 per month.

Strange to compare to the rate of inflation rather than the rate of programming expense

The global beer industry consolidated into a single firm in 2016, as Anheuser-Busch InBev and SABMiller merged. The combination controls over 2,000 beers, including most of the major non-craft brands in the world like Budweiser, Beck’s Bass, Labatt’s, Michelob, Corona, and Stella Artois. In the United States, Anheuser-Busch InBev and Miller-Coors control over 70 percent of beer sales.

The beer industry is still under threat of competition from craft beer though right? Is this really a monopoly when I can buy 40 other brands of beer at my local liquor store?

One remedy is to recognize that merger review is a quasijudicial, administrative process, and one that the public deserves to know more about. Industry comments on a major merger should be filed publicly, not in secret, and any interested member of the public should be encouraged to file comments. Finally, in major mergers, the agency, if it plans on a consent agreement, should put out its proposed remedy for meaningful public comment.

Seems like a good idea

There is an unfortunate tendency within enforcement agencies to portray breakups and dissolutions as off the table or only for extremely rare cases. There is no legal reason for that presumption: Indeed, the original practice favored dissolution as the default remedy—implied in the very word “antitrust.”

The “protection of competition” test is focused on protection of a process, as opposed to the maximization of a value. It is based on the premise that the legal system often does better trying to protect a process than the far more ambitious goal of maximizing an abstract value like welfare or wealth.

The English Magna Carta, the Constitution of the United States, and other foundational laws of democracies around the world were all created with the idea that power should be limited—that it should be distributed, decentralized, checked, and balanced, so that no person or institution could enjoy unaccountable influence. Yet this vision has always had a major loophole. Written as a reaction to government tyranny, it did not contemplate the possibility of a concentrated private power that might come to rival the public’s, of businesspeople with more influence than government officials, and of an artificial creature of law, the corporation, that would grow to have political protection exceeding that of actual humans.