4. ANTITRUST
BY ALAN GREENSPAN
The world of antitrust is reminiscent of Alice’s Wonderland: everything seemingly is, yet apparently isn’t, simultaneously. It is a world in which competition is lauded as the basic axiom and guiding principle, yet “too much” competition is condemned as “cutthroat.” It is a world in which actions designed to limit competition are branded as criminal when taken by businessmen, yet praised as “enlightened” when initiated by the government It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge’s verdict—after the fact
In view of the confusion, contradictions, and legalistic hairsplitting which characterize the realm of antitrust, I submit that the entire antitrust system must be opened for review. It is necessary to ascertain and to estimate: (a) the historical roots of the antitrust laws, and (b) the economic theories upon which these laws were based.
Americans have always feared the concentration of arbitrary power in the hands of politicians. Prior to the Civil War, few attributed such power to businessmen. It was recognized that government officials had the legal power to compel obedience by the use of physical force—and that businessmen had no such power. A businessman needed customers. He had to appeal to their self-interest.
This appraisal of the issue changed rapidly in the immediate aftermath of the Civil War, particularly with the coming of the railroad age. Outwardly, the railroads did not have the backing of legal force. But to the farmers of the West, the railroads seemed to hold the arbitrary power previously ascribed solely to the government The railroads appeared
Based on a paper given at the Antitrust Seminar of the National Association of Business Economists, Cleveland, September 25, 1961. Published by Nathaniel Branden Institute, New York, 1962.
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unhampered by the laws of competition. They seemed able to charge rates calculated to keep the farmers in seed grain—no higher, no lower. The fanners’ protest took the form of the National Grange movement, the organization responsible for the passage of die Interstate Commerce Act of 1887.
The industrial giants, such as Rockefeller’s Standard Oil Trust, which were rising during this period, were also alleged to be immune from competition, from the law of supply and demand. The public reaction against the trusts culminated in the Sherman Act of 1890.
It was claimed then—as it is still claimed today—that business, if left free, would necessarily develop into an institution vested with arbitrary power. Is this assertion valid? Did the post-Civil War period give birth to a new form of arbitrary power? Or did the government remain the source of such power, with business merely providing a new avenue through which it could be exercised? This is the crucial historical question.
The railroads developed in the East, prior to the Civil War, in stiff competition with one another as well as with the older forms of transportation—barges, riverboats, and wagons. By the 1860’s there arose a political clamor demanding that the railroads move west and tie California to the nation: national prestige was held to be at stake. But the traffic volume outside of the populous East was insufficient to draw commercial transportation westward. The potential profit did not warrant the heavy cost of investment in transportation facilities. In the name of “public policy” it was, therefore, decided to subsidize the railroads in their move to the West.
Between 1863 and 1867, close to one hundred million acres of public lands were granted to the railroads. Since these grants were made to individual roads, no competing railroads could vie for traffic in the same area in the West Meanwhile, the alternative forms of competition (wagons, riverboats, etc.) could not afford to challenge the railroads in the West Thus, with the aid of the federal government, a segment of the railroad industry was able to “break free” from the competitive bounds which had prevailed in the East.
As might be expected, the subsidies attracted the kind of promoters who always exist on the fringe of the business community and who are constantly seeking an “easy deaL” Many of the new western raikoads were shabbily built: they were not constructed to carry traffic, but to acquire land grants.
The western railroads were true monopolies in the textbook sense of the word. They could, and did, behave with an aura of arbitrary power. But that power was not derived from a free market. It stemmed from governmental subsidies and governmental restrictions.1
When, ultimately, western traffic increased to levels which could support other profit-making transportation carriers, the railroads’ monopolistic power was soon undercut. In spite of their initial privileges, they were unable to withstand the pressure of free competition.
In the meantime, however, an ominous turning point had taken place in our economic history: the Interstate Commerce Act of 1887.
That Act was not necessitated by the “evils” of the free market. Like subsequent legislation controlling business, the Act was an attempt to remedy the economic distortions which prior government interventions had created, but which were blamed on the free market. The Interstate Commerce Act, in turn, produced new distortions in the structure and finances of the railroads. Today, it is proposed that these distortions be corrected by means of further subsidies. The railroads are on the verge of final collapse, yet no one challenges the original misdiagnosis to discover—and correct —the actual cause of their illness.
To interpret the railroad history of the nineteenth century as “proof of the failure of a free market, is a disastrous error. The same error—which persists to this day—was the nineteenth century’s fear of the “trusts.”
The most formidable of the “trusts” was Standard Oil. Nevertheless, at the time of the passage of the Sherman Act, a pre-automotive period, the entire petroleum industry amounted to less than one percent of the Gross National Product and was barely one-third as large as the shoe industry. It was not the absolute size of the trusts, but their dominance within their own industries that gave rise to apprehension. What the observers failed to grasp, however, was the fact that the control by Standard Oil, at the turn of the century, of more than eighty percent of refining capacity made economic sense and accelerated the growth of the American economy.
Such control yielded obvious gains in efficiency, through the integration of divergent refining, marketing, and pipeline operations; it also made the raising of capital easier and
11 am indebted to Ayn Rand for her identification of this principle. See her “Notes on the History of American Free Enterprise” (chapter 7).
cheaper. Trusts came into existence because they were the most efficient units in those industries which, being relatively new, were too small to support more than one large company.
Historically, the general development of industry has taken the following course: an industry begins with a few small firms; in time, many of them merge; this increases efficiency and augments profits. As the market expands, new firms enter the field, thus cutting down the share of the market held by the dominant firm. This has been the pattern in steel, oil, aluminum, containers, and numerous other major industries.
The observable tendency of an industry’s dominant companies eventually to lose part of their share of the market, is not caused by antitrust legislation, but by the fact that it is difficult to prevent new firms from entering the field when the demand for a certain product increases. Texaco and Gulf, for example, would have grown into large firms even if the original Standard Oil Trust had not been dissolved. Similarly, the United States Steel Corporation’s dominance of the steel industry half a century ago would have been eroded with or without the Sherman Act.
It takes extraordinary skill to hold more than fifty percent of a large industry’s market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one’s product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency—and deserves praise, not condemnation.
The Sherman Act may be understandable when viewed as a projection of the nineteenth century’s fear and economic ignorance. But it is utter nonsense in the context of today’s economic knowledge. The seventy additional years of observing industrial development should have taught us something.
If the attempts to justify our antitrust statutes on historical grounds are erroneous and rest on a misinterpretation of history, the attempts to justify them on theoretical grounds come from a still more fundamental misconception.
In the early days of the United States, Americans enjoyed a large measure of economic freedom. Each individual was free to produce what he chose, and sell to whomever he chose, at a price mutually agreed upon. If two competitors concluded that it was to their mutual self-interest to set joint price policies, they were free to do so. If a customer re-