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Economists and Antitrust

May 11, 2000

The current debate on the fate of Microsoft has managed (once
again) to cause division in the economics profession, even among those who
call themselves free-market economists.

On the one hand in the "free
market" camp, there are the Austrians and their fellow travelers who
believe that antitrust laws have no place in our economy and should be
taken off the books.

On the other hand, however, are adherents of the Chicago School,
who seem to be divided in their opinions regarding Microsoft, but agree
that there should be some role for antitrust legislation in order to keep
firms "honest."

Hence, we have Robert Bork, author of The Antitrust
Paradox
, a book that mostly dissented from standard pro-antitrust views,
now being a paid spokesman for Microsoft's rival, Netscape. Bork even has
endorsed an old-style antitrust "remedy," calling for the breakup of the
embattled software giant. Other Chicago-oriented economists are not sure,
although they seem to hold to a "last resort" view of antitrust.

Take Thomas Sowell, for example, who received his doctorate in
economics at Chicago and later taught at UCLA, which was a thoroughgoing
Chicago-oriented program. He has repeatedly condemned the Microsoft
decision and the Justice Department's attempts to dismember that company.

However, Sowell has not brought himself to condemn the various antitrust
laws which are the real culprit, although his latest columns have come
close.

There is good reason why Austrians oppose antitrust laws. Not only
are they purposely vague, but they represent a clear government assault
upon private property. Antitrust laws operate in the same way that the
economic laws of fascist Italy and Germany worked during the 1930s: they
allow for a de facto nationalization of private enterprise without the
government taking actual title.

Ludwig von Mises and Murray Rothbard of the Austrian School
adamantly pointed out that private property is essential in the workings of
an economy. As Mises noted in his discussion of socialism, private
(unencumbered by government) ownership of the factors of production is
necessary for economic calculation to occur. Without such calculation,
Mises wrote, the economy would descend into chaos, something that was
eloquently borne out in the various socialist schemes for most of the 20th
Century.

That private property is necessary for economic efficiency
separates the Austrians from the other schools of thought, including the
Chicago School. The other factions hold that economic efficiency is simply
a matter of pricing at marginal cost. According to their doctrines, any
firm charging a price not equal to marginal cost creates a "market failure"
that cannot be rectified by the market. Thus, the government must
intervene to correct this aberration.

Austrians, on the other hand, believe such notion are pure folly.
The idea that anyone in government--or even private enterprise--can know
a particular firm's "marginal cost" at any stage of production is an
exercise in self-delusion, for it would require an omniscience that no one
possesses.

This gulf between Austrians and the other schools of economic
thought is highlighted by a number of other differences. Austrians view
market competition as a process, while others see competition as various
static states which range from perfect competition to monopoly. The
Neomarshallian view of competition holds that the natural state of economic
affairs is the inevitable move from competition to monopoly. In other
words, unless government intervenes, once-competitive markets, over time,
will be transformed from states of pure competition to states in which
firms own nearly pure monopoly privileges.

Austrians, on the other hand, take a different approach. They
often note that in the beginning stages of production, relatively few firms
produce goods and services. As these firms earn economic profits, however,
entrepreneurs try to seize new opportunities for profit.

As production continues and the potential market for the particular
good or service grows, firms often tend to merge. This is not necessarily
a sign of lessening competition, Austrians contend. Rather, they note that
the only way a firm can expand its operations--outside of government help--is to produce something that pleases a large number of customers, what
Mises called "consumer sovereignty."

Therefore, Austrians see the growth
of John D. Rockefeller's Standard Oil Company as being the result of the
firm's ability to provide customers with a good product at a low price, not
the other way around. As Austrians and other defenders of Rockefeller
note, the growth of the Standard Oil Company coincided with better services
and lower prices to consumers.

The differences between the two camps are fundamental and mutually
exclusive. On the one hand, Austrians are not bound by the Neomarshallian
models featuring smooth, continuous, U-shaped cost curves, and the standard
by which firms know marginal cost and marginal revenue at every unit of
production. These models, Austrians, contend, are crude at best and
misleading at worst. While they may make for nice classroom (and
courtroom) pedagogical tools, they are hardly the stuff governments can use
to micromanage the affairs of business firms.

In fact, it was the very use of these models which formed the
differences between Mises and Oskar Lange in the Socialist Calculation
Debate of the 1930s. Lange held that government could use the
Neomarshallian models to set prices and outputs, since costs were objective
and the information needed for decisionmaking was embedded in the cost
curves themselves.

Mises argued that Lange's reasoning was ridiculous. Not only could
factor markets not operate without the institution of real private
property, but there also was no way that socialist planning agencies could
direct a country's economic affairs using crude, unsophisticated classroom
models. In 1939, Lange won the praise of his peers, who declared him the
"winner" of the debate. In 1990, Mises was vindicated by actual events.

Understanding the limits of the modern neoclassical models is
essential to understanding the current debate over the efficacy of
antitrust law. If the potential explanatory power of these models is weak,
then harnessing them to laws which usurp private property is not only
counterproductive, but also exposes government power grabs for what they
really are. That economists have made millions of dollars testifying in
antitrust case (and using their crude models as props) also tells us that
some members of this profession are doing more than altruistically
promoting "economic efficiency."

Austrian economists for more than a century have given accurate
explanations for the economic phenomena which we have observed. In the
case of Microsoft, they have not fallen into the trap of looking at the
particular circumstances to see whether or not Bill Gates and Company
"broke the law." Instead, Austrians have insisted antitrust legislation
itself is fatally flawed. It is time to challenge the modern neoclassical
paradigms upon which antitrust laws rest. In the words of Mr. Bumble in
Dicken's Oliver Twist, "If that be the law sir, then the law is a ass."

* * * * *

Willian Anderson teaches economics at North Greenville College. Send him MAIL.


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