Competition Can’t Be Planned
The Abolition of Antitrust
Gary Hull, Ed.
Transaction Publishers, 2005
xi + 176 pgs.
The authors of this important book have undertaken a twofold task. They continue the free- market criticism of antitrust legislation by Dominick Armentano and other economists who defend laissez-faire. Armentano himself has an excellent article here; and Thomas Bowden and Eric Daniels contribute outstanding discussions of the legal and historical background of antitrust.
But the authors have in mind a more ambitious and original goal. Economic and legal arguments against antitrust, they contend, do not suffice: we must penetrate to the philosophically flawed essence of antitrust in order fully to uproot this misbegotten product of modern interventionism. To accomplish this ambitious goal, we must of course think from the standpoint of a sound philosophy; and this, in the opinion of our authors, is Objectivism.
Proponents of antitrust maintain that monopoly prices impose a welfare loss on the economy. Murray Rothbard, the most far-reaching of all critics of the economic theory of monopoly, explains the standard view in this way: "A certain quantity of a good, when produced and sold, yields a competitive price on the market. A monopolist or a cartel of firms can, if the demand curve is inelastic at the competitive-price point, restrict sales and raise the price, to arrive at the point of maximum returns" (Man, Economy, and State, Scholar’s Edition, [Mises Institute, 2004], p. 672). Unfortunately, none of the contributors cite Rothbard’s work.
Suppose the standard view were correct; and suppose further that the higher price imposes a welfare loss on society. Harry Binswanger raises a fundamental point: "The owners [of a firm] have the inalienable right to decide how they will use and dispose of the firm’s product. They may charge nothing for the product, a billion dollars for it, or anything in between. . . . It is their product, just as the customer’s money is his" (p. 132).
As Binswanger rightly notes, antitrust advocates act with particular ill grace when they assail the prices charged by monopolists who introduce altogether new products. Rather than praise innovators for their efforts to satisfy consumers in radically new ways, these carping critics indict them for deviations from what they deem the socially correct price.
But Binswanger’s argument, as it stands, is not complete. If the monopolist holds legitimate title to his property, then Binswanger’s point hits home: why should he not be free to seek whatever price he can get? But under what conditions does one acquire property? Binswanger does not tell us; and I do not think that Objectivists of his school have given a satisfactory account of this issue. Absent such an account, a defender of antitrust can say to Binswanger: "I grant you that an owner of property can ask whatever prices he wishes for what he owns. But, in my view, capitalists are not ‘owners’ in the sense you suggest."
Unclarity about property rights also weakens the force of the claim that antitrust theory rests on the false philosophical doctrine of altruism. If capitalists are required to price their products according to the dictates of a certain welfare ideal, has not altruism supplanted individualism? Why must the businessman sacrifice his own interests for those of others? "Thus, on the premise of altruism, businessmen are extortionists: businessmen charge money for relinquishing possession of goods, but these goods, altruism holds, rightfully belong to those who hold or need them. . . . The moral theory of altruism results in an inverted version of property rights: ownership by means of non-production" (p. 139).
This argument strikes me as confused. An altruist would contend that the businessman must sacrifice his own property to others. But do not advocates of antitrust contend rather that individuals can acquire property only subject to certain limitations? They do not then say that businessmen should altruistically give up what they own. Binswanger might respond that only an altruist could hold such a view of property rights, but this is not so. Those who contend that "society" owns all resources are to my mind profoundly mistaken. But to adopt the views of, e.g., Henry George or Hillel Steiner on property acquisition does not make one an altruist.
John Ridpath endeavors to show the philosophical mistakes involved in Frank Knight’s view of economics. Knight in Risk, Uncertainty, and Profit developed the model of perfect competition that, Ridpath holds, underlies modern antitrust policy; if so, a convincing attack on Knight strikes a decisive blow to antitrust. Ridpath’s efforts are not altogether a success. Under perfect competition, all firms in an industry have the same costs, and everyone has full knowledge of all relevant information. Ridpath objects: "The basic fact of reality is that everything that exists has an identity—everything, including human knowledge, is specific and finite. A world of undifferentiated products, traded by infinitely numerous and infinitely knowledgeable beings, is metaphysically impossible" (p. 19).
But surely the postulate of the perfect competition model is that firms have very specific knowledge, i.e., whatever they need to know to make judgments about price and cost. Their knowledge is hardly infinite in any questionable sense. Ridpath, though, may also have in mind another objection. How can two different firms be identical in all their attributes? Does not Leibniz’s Law tell us that entities with the same attributes are identical? Here once more the argument relies on a false assumption. Only in certain relevant respects are the firms under perfect competition the same: so long as, e.g., a different person owns each firm, the appeal to Leibniz’s Law is unavailing.
Knight famously argued that profit depends on uncertainty: the entrepreneur cannot calculate in advance the chances his investment will be successful. By "profit" he of course meant a return that exceeds the rate of return on capital, i.e., the rate of interest. Knight here is making a very similar point to that stressed by these Objectivist authors themselves. Businessmen are creative, and it is this that accounts for their ability to earn profits. "As was the case with earlier market leaders—Ford, Alcoa, Kodak, Xerox, and IBM—Microsoft earned its position of leadership. All of these companies were not just market leaders: they were market creators. . . . The market creator provides a practical demonstration of the value and salability of a new product" (p. 134).
Ridpath ascribes this perfectly true claim to Knight’s irrationalism. Knight was a philosophical disciple of Heraclitus and Henri Bergson; as such, he held that change could not be explained. "In the world of perfect competition, the ‘pure’ profits earned by entrepreneurs would not exist. Knight concluded that these profits must have their source in Heraclitean uncertainty. Profits, which in fact are the earned reward for intelligently and courageously producing material values, are to Knight nothing more than manna randomly sprinkled by the unknowable flux and human irrationality" (p. 23).
The fact that entrepreneurial gain cannot be calculated in advance is a perfectly ordinary truth of experience; it does not depend on controversial philosophical views. Ridpath is right that, on Knight’s view, there is a type of change, which Knight calls "Bergsonian," that cannot be rationally explained (p. 21). It hardly follows from this, though, that Knight thought that no change whatever can be explained. It also does not follow from Knight’s reference to Bergsonian change that he was a disciple of Bergson, who was, by the way, as much a twentieth-century philosopher as a "nineteenth-century Heraclitean" (p. 21).
Much more successful are the essays in Part II, "The Legal History of Antitrust." Thomas A. Bowden maintains that the progress of civilization depends on the extension of contract. "Contract law, then, aims not at benefiting a privileged economic class but at supplying an objective requirement of life in civilized society. Because the ability to make contracts serves man’s basic economic needs, the wider the scope of contract, the greater will be the potential for individuals to grow and prosper" (p. 103).
During the nineteenth century, the development of contract took giant steps forward. "The great, largely unrecognized achievement of nineteenth century lawmakers was to take the broad, general structure of government handed down to them by the Founding Fathers and translate it into a capitalist legal system, with freedom of contract as its keystone" (p. 107).
This happy tale came to an "abrupt end" once antitrust legislation began to be enacted in the 1890s. No longer could firms make contracts as they wished. If, e.g., a company wanted to guarantee price discounts to regular customers, it might find that antitrust laws barred the way. Its discounts might constitute unacceptable "price discrimination."
Bowden’s argument must face an objection, but to this he has an insightful response. All contracts take place within a certain legal framework that defines property rights. If I steal your copy of Atlas Shrugged and trade it for a copy of Lou Thesz’s autobiography, I cannot complain that when the law refuses to recognize my exchange, it has restricted my freedom of contract. In like fashion, why cannot defenders of antitrust claim that they are specifying property rights, rather than destroying freedom of contract?
But in a legal framework that allows freedom of contract, people must have a clear idea of what actions fall within their legal powers. Here precisely lies the failing of antitrust legislation. Virtually any action of a business stands subject to condemnation as "restraint of trade"; any contract may be without notice overturned by a court or administrative tribunal. "Because antitrust laws can be employed arbitrarily to outlaw any type of contract, parties to an agreement cannot know in advance whether their actions will be deemed legal or illegal" (p. 111).
Bowden emphasizes the role of freedom of contract in American legal history; and Eric Daniels in his excellent "Reversing Course: American Attitudes about Monopolies, 1607–1890" discusses a closely related theme. Following English legal precedent, Americans in the eighteenth and early nineteenth centuries saw monopoly as a government grant of privilege, and a movement against such grants found considerable support in the courts.
But "[b]eginning in the 1790s, pro-monopoly politicians exhibited a deep-seated belief that certain businesses—banking, canals, roads, harbors, schools, even manufacturing and industrial concerns—were inherently different from others because of their public character" (p. 75). Unfortunately, the courts also took up this doctrine, and the distinction between coercive monopolies and voluntary business activities was attenuated. With Munn v. Illinois (1876), disaster struck. Here the Supreme Court held that states could regulate any business where the public claims an interest. "On this standard, no business could possibly escape state regulation—when the ‘public’ dictates what private individuals may do with their property, all pretense of rights vanishes" (p. 86).
No review of this book could be complete that ignored a remarkable discovery made by one of the contributors. Richard M. Salsman has identified a hitherto unsuspected enemy of the free market—none other than Ludwig von Mises. Incredibly, he holds that Mises "improperly attributed profit to entrepreneurs and never refuted the myth that capitalists, in his own words, ‘are merely parasites who pocket the dividends.’ For Mises, even entrepreneurs merely buy low and sell high as a passive service to consumers who, he claims, are the real drivers of the economy and profit" (p. 45).
A more complete misunderstanding of Mises can hardly be imagined. In Mises’s view, the most significant entrepreneurs are capitalists, who use their judgment to decide how to invest their money in order to satisfy customers. Their activity is not at all passive: capitalists creatively anticipate the wants of consumers.
How has Salsman fallen into an error of such "numbing grossness," in Peter Strawson’s phrase? The causes of mental aberration far exceed my competence, but our learned author has apparently misread Mises’s comment that entrepreneurs "earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are" (p. 45, quoting Mises). Incredibly, he takes Mises to be saying that entrepreneurs are passive. Can he not grasp that Mises means that to be successful, the entrepreneur must be better than the competition, rather than "better" in some absolute sense? Salsman is also horrified by Mises’s claim that profits do not exist in his "imaginary friend," the evenly rotating economy (p. 45). Profits, says Mises, are never normal; is this not definitive proof that Mises is anticapitalist? If Salsman finds Mises’s use of the ERE beyond him, this is no concern of mine; but it is puzzling why the editor allowed his book to be disfigured by such obvious nonsense.
I do not know the philosophical views of Professor Armentano, but all of the other contributors are Objectivists.
See my discussion of the "left libertarianism" of Michael Otsuka, Libertarianism Without Inequality, in The Mises Review 9, no. 3 (Fall, 2003).