Organized Crime

When the U.S. government prosecuted the Microsoft Corporation during the 1990s (after a decade of “investigations” that turned up nothing illegal) the head of the U.S. Justice Department’s Antitrust Division, Joel Klein, rationalized the lawsuit by saying that it was in keeping with the long history of consumer protection regulation in America, beginning with the Sherman Antitrust Act of 1890. In reality, the history of antitrust regulation has been a history of politically-inspired witch hunts launched against America’s most innovative and entrepreneurial businesses, usually instigated by their sour-grapes competitors.

In the June 1985 issue of the peer-reviewed International Review of Law and Economics I showed that the industries accused of “monopolization” by Senator John Sherman and his colleagues were expanding production four times faster than the economy as a whole, on average (some as much as ten times faster) for the decade prior to the 1890 Sherman Act. They were also dropping their prices faster than the price level was dropping during this ten-year period of price deflation. The “trusts” were subjected to political attack precisely because they had been making products cheaper and cheaper, much to the dismay of their less efficient but politically-connected rivals. Antitrust was a protectionist racket from the very beginning.

The judge in the Microsoft antitrust case, one Thomas Penfield Jackson, was so biased that he was thrown off the case (i.e., fired) by the panel of three federal judges who had appointed him. One example of his bias was a magazine interview in which he compared Microsoft founder Bill Gates to John D. Rockfeller (and to Al Capone). Judge Jackson was way off base when he compared Gates to Capone, but not so much when he compared him to Rockefeller. As Dominick Armentano demonstrated in his book, Antitrust and Monopoly: Anatomy of a Policy Failure, Rockefeller’s Standard Oil Company caused the price of refined petroleum to fall from over 30 cents/gallon in 1869 to 5.9 cents in 1897 while creating myriad new products and stimulating innovation in the entire industry. For this, Rockefeller was prosecuted and forced to break up his company despite the fact that he had more than 300 competitors when he supposedly “monopolized” the oil industry.

In his classic, Antitrust and Monopoly, Dominick Armentano carefully examined fifty-five of the most famous antitrust cases in U.S. history and concluded that in every single case the accused firms were dropping prices, expanding production, innovating, creating new products, and generally benefiting consumers. It was not consumers who were being harmed, but the less-efficient, sour-grape competitors of these companies. For example, the American Tobacco Company was found guilty of “monopolization” in 1911 even though the price of cigarettes (per thousand) had declined from $2.77 in 1895 to $2.20 in 1907, all despite a 40 percent increase in raw material costs to the company.

In what is perhaps the best example of nonsensical double-talk in antitrust history, in 1944 Judge Learned Hand found Alcoa guilty of “monopolizing” the virgin ingot aluminum market by employing “superior skill and foresight” which the judge said “forestalled” competition by those businesses with less skill and foresight. He condemned Alcoa for being extremely adept at correctly anticipating market demand for its product and then supplying that demand, to the “exclusion” of higher-priced competitors.

Alcoa “embraced every new opportunity” with a “great” organization, intoned Judge Hand, and it staffed the organization with “elite business personnel.” This “sin” must be published, he said.

In 1962 the government prohibited the Brown Shoe Company, which had 1 percent of the shoe market, from acquiring Kinney Shoes, which also had a whopping 1 percent market share at the time. A company with 2 percent of the market supposedly threatened competition in the industry, the government ludicrously claimed.

In 1969 IBM had a 65 percent market share in the computer market and was sued by the federal government for allegedly monopolizing the computer industry. IBM was mired in a court battle for thirteen years before the government finally gave up on the case. In the meantime, the company was eclipsed in the marketplace by Intel, Microsoft, and other companies. This governmental assault on IBM undeniably weakened the company.

In 1962 the government forced the Schwinn Bicycle Company to divorce itself from its network of dealers. Foreign competition then drove Schwinn into bankruptcy.

General Motors was never prosecuted for violating the anti-monopoly laws, but the company’s fear of antitrust drove it to adopt a policy from 1937 to 1956 of never allowing its market share among the “Big Three” automakers to exceed 45 percent. This contributed to the company’s competitive downfall at the hands of foreign automakers, especially ones from Japan.

RCA was prohibited by antitrust regulators from charging royalties to American licensees, so the company licensed its products to Japanese companies instead. This led directly to the overwhelming dominance of the Japanese electronics industry in the American marketplace.

Antitrust regulation killed Pan American World Airways by forbidding it from acquiring domestic routes. Without these “feeder” routes for its international flights, the company went bankrupt.

Monopoly is impossible in a free market. Government is the real source of monopoly with its monopoly franchises, protectionist tariffs, licensing laws, “certificates of need,” and other monopolistic regulatory gimmicks like antitrust regulation.