This chapter aims to offer a historical illustration of the theory of pan-institutional development hitherto presented, with specific reference to the foundations and evolution of American antitrust policy.
Since the beginning of the 20th century, American administrations have been enforcing various antitrust approaches through the appointment of ad hoc experts at the head of the Federal Trade Commission and/or the Antitrust Division. By acting as a sort of issue network, this group favoured the translation of particular antitrust ideas into institutionalised policies, regulations, and practices in order to overcome economic downturns and address business needs.
The main arguments in support of this thesis are structured as follows: the first part of each section will frame the historical context of analysis, by explaining the relevant events causing the US institutional change process. The chapter starts with an investigation into the role of ideas in the institutionalisation of the first antitrust regulations in the US and goes on to follow the evolution of the discipline throughout the administrations that dealt with the three crises, namely, Roosevelt for the Great Depression; Nixon, Ford, Carter and Reagan for the Oil crises; and Bush and Obama for the current downturn. As previously stated, these three historical periods are relevant here not for their role in the collapse of the institutional framework of the time, but because they created the conditions for the emergence of new interests and, along with them, of new antitrust practices.
In conclusion, this chapter traces the process of antitrust institutional development in chronological sequence. This approach will help to verify the consistency of path dependency and to clarify the position of the state and governments at the intersection between interests and ideas.
1900S:THE SHERMAN ACT AND THE CLAYTON ACT
The earliest form of institutionalisation of antitrust in the US dates back to the nineteenth century, when the US Congress approved its first antitrust law, the Sherman Act, in order to discipline unfair economic activities, such as monopolies or cartels.
Specifically, the extended public negotiations for the approval of the Act took place in 1888 and lasted until 1890.411 At that time, no other country, apart from Canada, had adopted a similar juridical body to regulate monopolies and restrictive business practices;
views on the necessity of such antitrust provisions were initially polarized and this instigated two years of contentious debates.412 On the one hand, it was deemed necessary to foster competitiveness but, on the other, confidence in classical economic laissez faire and the neoclassical perfect-competition model remained high, as trusts were generally believed to lead to large-scale economies and productive efficiency gains.413
Even though these were not times of real crisis, such disputes took place in a period of political and economic uncertainty. In the wake of the Civil War, the burden of the northern industrial model over the country produced an increase in the number
411 Canada's Combines Investigation Act was promulgated before the Sherman Act. However, because of the differences in the legal processes, in the mechanism of interpretation used by the Courts, and the resourced applied to enforce the law, Canada antitrust regulations was less rigorous then that of the US.
412 Rudolph Peritz, Competition Policy in America, 1818-1992, History, Rhetoric, Law, 1996, Oxford University Press, 14.
413 Mary S. Morgan, ‘Competing notions of ‘competition’ in late Nineteenth-Century American economics’, 1993, 25 History of Political Economy 4, 563-604. Francis M. Scherer, ‘Efficiency, fairness, and the early contributions of economists to the antitrust debate’, 1990, Washburn Law Journal, 29, 247. Luca Fiorito and John Henry, ‘John Bates Clark on trusts: new light from the Columbia archives’, 2005, Quaderni del Dipartimento di Economia Politica, Università di Siena 462, 5.
of trusts and cartels. This phenomenon brought about a rapid change in the production system at a time when industrial activities benefited from such technological innovations as the development of national transportation and communication systems. According to Peritz, ‘while these revolutionary developments presaged much greater economic efficiency than had been known in the past, at the same time, entire industries were increasingly controlled by monopolies or cartels’, slipping out of the grip of the state.414 Railroads were the first instances of these huge consolidations, followed by processing and distribution firms, and then by massive integrated manufacturing enterprises.415
By 1890, while great trusts like John D. Rockefeller's Standard Oil dominated the markets, the American response to anticompetitive practices was twofold. States such as Kansas and Missouri pushed an anti-monopoly agenda by prosecuting corporations for restraining trade, while in the same year New Jersey, Delaware and New York approved new regulations allowing trusts and holding companies.416 This phenomenon was due to a different conception of competition. While American economic laissez faire essentially forbade any attempt to regulate trade practices, the growing economic power of corporations and the mounting social inequality were constantly challenging the belief that markets were self-policing.417 Thus, the ideas that inspired the creation of an appropriate antitrust law were bound to come from outside the economic orthodox perspective. Indeed, as long as competition was considered perfect and naturally inherent in the market, no need was felt for a discipline studying it.
Absent a coherent theoretical background to the study of competition and market behaviour, the Sherman Act, even as it was approved, was influenced by
414 Rudolph Peritz, 'The Sherman Anti-Trust Act of 1890, a more dynamic and open American economic system', 2008, Historians on America, U.S. Department of State publication, 30-38.
415 David Millon, ‘The Sherman Act and the Balance of power’, in E. Thomas Sullivan (ed.), The Political Economy of the Sherman Act, 1991, Oxford University Press, 88.
416 Rudolph Peritz, Competition Policy in America, 1818-1992, History, Rhetoric, Law, 1996, Oxford University Press, 10.
417 Ellis W. Hawley, The New Deal And The Problem Of Monopoly, A Study In Economic Ambivalence, 1966, Princeton University Press.
economists of all stripes. For instance, while orthodox economists regarded any attempt to rule competition as futile, in 1887 Clark informally maintained the necessity for an appropriate antitrust regulation. He held that all firms, if subjected to high fixed costs and economies of scale, would naturally end up merging to avoid ruinous bankruptcies.418 Other scholars, such as Commons, Stockings and Fetter, maintained the necessity to appropriately institutionalise antitrust regulations. According to Commons, antitrust law was a ‘viable means of collective actions to control corporate power’.419
For this reason, when the Sherman Act was approved in 1890, it contained two substantive sections: section one disposed that ‘every contract, combination […] or conspiracy, in restraint of trade […]’ was illegal, while section two declared illegitimate all activities associated with monopolisations or any ‘attempt to monopolise’.
Even though Peritz maintained that marginalism only began to influence antitrust doctrine with the Clayton Act, it is clear that the Sherman Act counts as the first attempt to institutionalise general marginalist principles.420 Indeed, although the first marginalist models could not clearly explain how a competitive enterprise could ever recover its fixed costs without colluding, it is not accidental that the Sherman Act was approved the same year in which Alfred Marshall declared his ‘marginalist revolution’ in economics.421
This early marginalist influence is particularly apparent in the ideas that drove Congress to enforce the law. These were underpinned by the realisation that, since competition is not perfect, economic egalitarianism cannot subsist. In this sense, some form of regulation was deemed necessary to protect not just competition and efficiency,
418 Herbert Hovenkamp, ‘The Reckoning of Post-Chicago Antitrust: the Long History of Economics in Antitrust’ in Antonio Cucinotta, Roberto Pardolesi, Roger van den Bergh (eds.), Post-Chicago developments in antitrust law, 2002, Edward Elgar Publishing Limited, chapter 1, 1-33.
419 Willard F. Mueller, ‘Antitrust in a Planned Economy: An Anachronism or an Essential Complement?’ June 1975, IX Journal of Economic Issues, 2, 159-179, 160-3.
420 Rudolph Peritz, ‘Antitrust Policy and Aggressive Business Strategy: A Historical Perspective on Understanding Commercial Purposes and Effects’, 2002, 21 Journal of Public Policy & Marketing 2, 237-242.
421 Rudolph Peritz, ‘Antitrust Policy and Aggressive Business Strategy: A Historical Perspective on Understanding Commercial Purposes and Effects’, 2002, 21 Journal of Public Policy & Marketing 2, 237-242.
but also economic opportunity and, along with it, the distribution of wealth.422 The primary aim of Congress was to keep firms from acquiring enough market power to raise prices artificially and to restrict output, making it impossible for consumers to purchase products at competitive prices. In fact, artificially high prices were condemned not for causing allocative inefficiency, but for ‘unfairly’ transforming consumer wealth into monopoly profits.423 This approach was maintained by Judge Robert Bork's 1966 Legislative Intent and the Policy of the Sherman Act. In his view, the American government approved antitrust regulations in an attempt to promote, above all, social welfare.424 Indeed, the majority of trusts operating in 1890 were highly productive and even Senator Sherman himself considered large corporations to be already quite efficient.425
Experience has shown that they are the most useful agencies of modern civilization. They have enabled individuals to unite to undertake enterprises only attempted in former times by powerful governments. The good results of corporate power are shown in the vast development of our railroads and the enormous increase of business and production of all kinds.426
Hence, despite their efficiency, trusts were condemned for generating an unequal distribution of wealth. However, a number of researchers have argued, from a public-choice perspective, that the Sherman Act dispositions had strong private interest components and that the decision of Congress was more producer- than
422 Hans B. Thorelli, The Federal Antitrust Policy: Origination of an American Tradition, 1955, Johns Hopkins Press, quoted in James May, ‘Historical analysis in Antitrust Law’, 1990, 35 New York Law School Law Review, 857-77.
423 Phillips A., ‘Antitrust Policies: Could they be tools of the establishment?’, in Werner Sichel (eds.), Antitrust Policy and Economic Welfare, 1970b, 56 Bureau of Business Research, University of Michigan, 58.
424 See, Robert Bork, ‘Legislative Intent and the Policy of the Sherman Act’, October 1966, 9 The Journal of Law and Economics, 7-48.
425 John S. Mc Gee, ‘Predatory Price Cutting: The Standard Oil (N.J.) Case’, 1958, 1 Journal of Law &
Economics, 137-169.
426 21 CONG. REC. 2457 (1890)
oriented.427 In other words, the Congress aimed to support competition in order to stimulate production efficiency.
In addition to promoting social welfare, many economists have hypothesised that the Sherman Act was also aimed at restraining the economic power of large corporations and at fostering greater competition among small firms.428 As Judge Hand stated in the ALCOA429 case, the Sherman Act was promulgated with a view to favour ‘a system of small producers, each depending for his success on his own skill and character, to one in which the great mass of those engaged must accept the direction of the few’430.
We can conclude that the approval of the Sherman Act was primarily due to Congress’ desire to promote economic efficiency and welfare. Its implementation is to be considered a unique juridical projection of the economic interests of the time, which were stimulated and sustained by the emergence of new marginalist economic ideas of imperfect competition.
Institutional Evolution: The Clayton Act and the Twenties
The second most significant change in the political and ideological perspectives on American competition policy occurred during the early twentieth century, when it became evident that the new industrial and financial empires were destroying the American dreams of freedom and equal possibilities. The interests that pushed for the enforcement of new antitrust rules were motivated by the need to control mergers more strictly, by creating specific agencies in charge of supervising and enforcing antitrust.
427 Christopher Grandy, ‘Original Intent and the Sherman Antitrust Act: A re-examination of the Consumer Welfare Hypothesis’, 1993, 53 Journal of Economic History 2, 359-376.
428 Robert H. Lande, ‘Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged’, September 1982, 34 Hastings Law Journal 65, 71-84.
429 ALCOA is the acronym for “The Aluminium Company of America" firms that, under President F. D.
Roosevelt, was charged by the Justice Department with illegal monopolization, and demanded to be dissolved in 1938.
430 Alan D. Neale, The antitrust law of the U.S.A. A study of competition enforced by law, 1968, Cambridge University Press.
This is because a large number of firms were starting to consolidate their trusts and cartels and, absent an institutionalised antitrust bureau, they could easily elude the restrictions imposed by the Sherman Act and de facto render void many of its dispositions.
Since Clark’s ideas on workable competition reflected a general sense of urgency for some kind of national control over unfair competition practices, they soon began to gain enough influence and credibility to inspire policymakers on the ground. For instance, Woodrow Wilson's New Freedom Plan, clearly inspired by Clark, supported the enforcement of a new legislation that could restore safe competition and erase all the special privileges and unfair practices associated with the trusts. The plan emphasised the need to guarantee economic freedom by implementing ‘a body of laws which will look after the men who are on the make rather than the men who are already made’.431 According to the supporters of New Freedom ideas, prosperity was a direct result of competitive behaviour in the market. They believed that, in order to overcome the recession, it was necessary to decentralise business structures and to allow competitive forces so as to maintain economic balance through the investigation and prosecution of antitrust and anticompetitive practices; capitalists, here, were seen as the main cause of the on-going recession.
Similarly, Theodore Roosevelt’s New Nationalism Plan regarded the concentration of economic power as a consequence of mass production and advancing technologies. According to Roosevelt, competition wasted resources and produced social inequality, thus the state had a right to intervene in order to ensure a more equal distribution of the benefits of modern industrialisation. The New Nationalists supported a planned-economy scheme; they claimed that some form of concentration of economic
431 Eleanor Fox, Lawrence Sullivan, Rudolph Peritz, Cases and Materials on U.S. Antitrust in Global Context, American Casebook Series, 2004, Thomson West, 48.
power was essential to achieve market efficiency. Business concentrations may have been one of the main causes of the Great Depression, but they had also accelerated mass production and technical progress in the years leading up to it. At the same time, however, the New Nationalists believed that central administrations had a duty to organise and control business activities in order to restore the economic balance and to prevent future breakdowns. Furthermore, Arthur Jerome Eddy’s New Competition theory highlighted the need for government supervision of business agreements.432 The government would thus become responsible for the proper functioning of fair competition. In a nutshell, New Competition supporters argued that some form of business–government cooperation – short of full government intervention – could be highly effective.
These different approaches, while presenting contrasting takes on the economic recovery, all subscribed to Clark’s call for greater state control on trade practices. As soon as Wilson became president, these ideas were quickly put to the test with the enforcement of the Clayton Act and the Federal Trade Commission Act.433 The implementation of the Clayton Act in 1914 reflected the need to add further substance to the US antitrust regime by seeking to prevent anticompetitive practices in their incipiency.434 The law contained provisions against price discriminations, restrictive deals, as well as mergers and acquisitions. In addition, it provided a right to injunctive relief
432 Arthur J. Eddy, The New Competition, 1920, Chicago, Mc Clurg. Alvin S. Johnson, ‘The New Competition by Arthur J. Eddy’ , 1913, 28 Political Science Quarterly 1, 142-145. Mark Tadajewski, Competition, cooperation and open price associations: Relationship marketing and Arthur Jerome Eddy (1859-1920), 2009, 1 Journal of Historical Research in Marketing 1, 122 – 143.
433 Willard F. Mueller, ‘Antitrust in a Planned Economy: An Anachronism or an Essential Complement?’ June 1975, IX Journal of Economic Issues, 2, 159-179, 164. John Clark, Toward a Concept of Workable Competition, 30 Am. Econ. Rev. 241 (1940). George W. Stocking, ‘The Rule of Reason, Workable Competition and the Legality of Trade Association Activities’, 1954, 21, The University of Chicago Law Review, 4, 527-619.
President Wilson attributed a lot of importance to academia. For example, in 1917, he established a study group, called The Inquiry and made up of 150 academics, which was aimed at preparing the peace negotiations drafts that would have been used after the end of World War I.
434 Phillips A., ‘Antitrust Policies: Could they be tools of the establishment?’, in Werner Sichel (eds.), Antitrust Policy and Economic Welfare, 1970b, 56 Bureau of Business Research, University of Michigan, 61.
‘against threatened loss or damage by a violation of the antitrust laws’ by sanctioning private remedies.435 Secondly, the Federal Trade Commission Act established the Federal Trade Commission, a body in charge of suing large corporations involved in anticompetitive trade practices, carrying out investigations, and issuing cease-and-desist orders.436
Despite such substantial reforms to the body of antitrust law, the Great Depression, together with the level of mass unemployment and declining incomes that came with it, divided public opinion once again and marked the emergence of new economic interests and of the consequent need for an institutional response. Thus, at the beginning of his mandate, Roosevelt was faced with the need to push forward new economic reforms and to formulate a consistent set of business policies in order to increase economic welfare while preserving democratic values, restoring competition, and regulating the market.437
1930-1960S:THE GREAT DEPRESSION AND HARVARD COMPETITION POLICY
The Great Depression and the subsequent economic and political upheavals offer another interesting example of antitrust institutionalisation in times of change. At that time, the need to foster the American economy and to overcome the recession pushed President Roosevelt to radically intervene in the market with a new set of fiscal and economic policy reforms collectively known as the New Deal.
Although historians have paid considerable attention to Roosevelt's policies and his attempts to reduce the negative consequences of the recession, comparatively little has been said about the American approach to antitrust changed during the crisis.
435 Sect.26, 15 USC § 19.
436 FTC Act §5 (a) (1). Clifford A. Jones., Private Enforcement of Antitrust Law, in the EU, UK and USA, 1999, Oxford University Press, 10.
437 Arthur M. Schlesinger, The Coming of New Deal 1933-1935 (The Age of Roosevelt), 1959, Volume 2, Boston, Houghton Mifflin, 179-84.
Inspired by interventionist ideas, the New Deal introduced various provisions embodied in the National Industry Recovery Act (NIRA), which aimed to establish governmental control over private economic powers in order to promote free competition, social equity, and economic development.438 Approved by the Congress on June 16, 1933, with a small majority of the Senate, the NIRA was considered, especially on account of its social policy aspirations, the symbol of national mobilisation against the common enemy of the Great Depression.439 However, the Act was not in force for long as it was considered an attempt to establish central control on private investments and was therefore declared unconstitutional by the Supreme Court with the ALA Schechter Poultry Decision of 1935.440
However, during the NIRA era, antitrust faced ‘its darkest moment’, as the plan had essentially replaced fair competition with a system in which government and business ‘cooperated’ against the recession.441 The core of the NIRA, touted by
However, during the NIRA era, antitrust faced ‘its darkest moment’, as the plan had essentially replaced fair competition with a system in which government and business ‘cooperated’ against the recession.441 The core of the NIRA, touted by