Neither populist nor neoclassical: the classical roots of the competition principle in American antitrust Nicola Giocoli University of Pisa
[email protected] Much of the current critical views on American antitrust law focus on a supposed misinterpretation by modern, welfare-driven antitrust enforcers of the true meaning of the competition principle. The paper contributes to the debate by reconstructing the principle’s historical origin. While it did not feature in the Sherman Act, the competition principle was introduced by the Supreme Court during the formative era of antitrust law. Between 1897 and 1911 the Court proposed alternative versions of the principle; the one which eventually prevailed was neither populist nor neoclassical, as it was based on classical political economy and, in particular, on freedom of contract and “natural” values. Yet, this historical circumstance is not necessarily bad news for recent proposals to reform antitrust law.
THIS VERSION: JUNE 2018 WORD COUNT: 18,432
Introduction
Antitrust is about protecting competition, or so it should be. However, the word “competition” has no single, undisputable meaning. As historians of economics know well, it never had. Even the Sherman Act offers little help in this regard, because, as is also well known, it does not even contain the word “competition”. And it is at least debatable that 1890 Congressmen voting Senator Sherman’s proposal into law had a unique, let alone clear, notion of “competition”. Indeed, it may well be argued that “protecting competition”, whatever this might mean to them, was not even their true or predominant goal. It is much easier to identify how competition is interpreted in modern antitrust. Several interpretations do exist, but one has dominated antitrust enforcement since the 1980s. Competition is all about having low prices in the marketplace. By protecting competition and, therefore, by keeping prices low, antitrust promotes consumer welfare. The specific goal of antitrust is thus to protect competition in order for consumers to receive the full benefit of competition itself, a benefit neoclassical economics identifies with low prices and high consumer welfare. That this be the sole goal of antitrust is the core thesis of the so-called Chicago approach, which has shaped American antitrust law for the last 40 years. While it is true that courts 1
never fully endorsed its most extreme implications, it is undeniable that today’s antitrust law still follows the path paved by Robert Bork’s manifesto, The Antitrust Paradox (Bork 1978). However, putting standard price theory and consumer welfare at centerstage has not been neutral in terms of actual law enforcement. The times when, especially in merger or predatory cases, it could be said that “the Government always wins”,1 are long gone. Since the 1980s, the hurdle set by a rigorous application of economic analysis has made extremely difficult – though surely not impossible – for government or private plaintiffs to win a verdict against an alleged antitrust violation. Triggered by the aftermaths of the great financial crisis, the alleged rise of inequality in the American economy and the expansion of the web economy, a lively debate has recently started (actually, re-started) in the US about antitrust law. Many critical voices - variously christened as movement antitrust, populist antitrust, neo-Brandeisian antitrust, or even hipster antitrust - have called for a deep rethinking of the antitrust enterprise. The overhaul, it is argued, should begin from a radical redefinition of its main goal and, consequently, the abandonment of the Chicago view. Both the goal and the approach are deemed totally inadequate to curb the vast and rising market power of the so-called Big Five of the web economy (Alphabet/Google, Amazon, Apple, Facebook, and Microsoft). Absent immediate intervention, critics lament, the American economy is destined to be subjugated by the monopolistic power of the Big Five. American democracy will eventually suffer too. One of the clearest expositions of this critique came in the 2017 Yale Law Journal, where legal scholar Lina Khan focused on Amazon’s market behavior to lament that “the current framework in antitrust – specifically its equating competition with ‘consumer welfare’, typically measured through short-term effects on price and output – fails to capture the architecture of market power in the twenty-first century marketplace. In other words, the potential harms to competition posed by Amazon’s dominance are not cognizable if we assess competition primarily through price and output. Focusing on these metrics instead blinds us to the potential hazards” (Khan 2017, 716-7). Khan’s essay has been widely read and discussed, including in the generalist press, like the New York Times and Washington Post. Its popularity bears testimony to the fact that, as Khan herself states, “[t]hough relegated to technocrats for decades, antitrust and competition policy have once again become topics of public concern” (id., 803). The feeling that “antitrust is sexy again” (Shapiro 2018) is not exclusive to movement antitrust, as it is shared even in more traditional circles. According to a bastion of economics-based-yet-pro-active antitrust like the American Antitrust Institute, “competition is now on the front pages, as concerns over rising concentration, extraordinary profits accruing to the top slice of corporations, slowing innovation, and widening income and wealth inequality have galvanized attention” (American Antitrust Institute 2016, 1). At the same time, no less than the University of Chicago has hosted a
1
To quote Justice Potter Stewart’s famous dictum in United States v. Von's Grocery Co., 384 U.S. 270, (1966), at 301.
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conference tellingly titled Is there a concentration problem in America?, where the adequacy of Chicagodriven antitrust has been expressly debated (Rolnik ed. 2017). Still, today’s controversy is driven by supporters of more radical views. While the complaints of movement antitrust are not univocal, as they “are lodged, variously, against absolute size, industrial concentration, high prices, leverage, and unspecified injury to small business” (Hovenkamp 2018, 16), one trait is common. Critics agree that an antitrust enterprise driven exclusively by economic theory and economic goals is out of step with the fundamental concerns that drove the enactment of the Sherman Act during the Gilded Age and that should again be at center stage in our, so-called New Gilded Age - an era that, like the original one, purportedly shows the negative consequences for American people of giant business size, exploitative market power and nasty corporate abuses. The key for triggering a U-turn in antitrust enforcement lies, it is claimed, in rethinking competition. Everyone in the radical camp believes, contra Bork, that antitrust law is not - or at least not exclusively - about consumer welfare and that the price-theoretic view of “competition = low prices” should be discarded as inadequate, over-simplified and, above all, unfaithful to legislative intent. A different, allegedly richer idea of competition should be used in its stead. An idea relying on a broader set of principles than economics, including explicitly socio-political values. As one of the most authoritative critics of the Chicago approach put it long ago, “it is bad history, bad policy, and bad law to exclude certain political values in interpreting the antitrust laws” (Pitofsky 1979, 1051). Once we have acknowledged that movement antitrust proposes to divorce antitrust law from economic analysis and to replace the consumer welfare framework with a socio-political approach, the question arises as to what the allegedly thicker notion of competition should consist of. Regardless of one’s own views, this is a key, yet seldom seriously investigated, issue for the current debate. This paper tries to contribute to its clarification by recalling how, when and why the notion of competition entered antitrust law. As it turns out, the above-mentioned truism (“antitrust is about competition”) was hardly a given in the early days of American antitrust. By reconstructing the origin of the so-called competition principle - viz., the idea that competition is fundamentally “a good thing” and that the law should therefore defend it - I try to set the record straight on the circumstances that led to the introduction of the principle itself and, above all, on the specific intellectual background that underlined it. Contrary to the claim of movement antitrust, economics was indeed decisive for the formulation of the principle. However, contrary to Bork’s and other Chicago supporters’ claim, it did not stem from neoclassical economics (and therefore from a more or less implicit notion of consumer welfare), but rather from a pillar of classical political economy, namely, the very political idea of freedom. In a nutshell, competition was “a good thing” because, in the view of the Supreme Court Justice who first affirmed the principle, it was an essential ingredient of Adam Smith’s classical system of natural liberty, i.e., of the only socio-political and economic organization of human affairs that, by warranting absolute legal protection to individual freedom, could provide justice and wealth to society.
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1. Two notions of free competition
To start with, it is important to understand what “free competition” exactly means? Free from what? How to assess when and if such “freedom” exists? This question admits of two answers. According to the commonest interpretation, the yardstick of free competition is, quite literally, the existence of the freedom to compete, or freedom to trade. Under free competition, individuals should be free to pursue any kind of market activity without external interference or constraint, whatever its source. This interpretation is bound up with economic theory. A freely competitive market is depicted as an atomistic structure of diffused property, made up of prevalently small businesses, a universe of “small dealers and worthy men”,2 whose independence and possibility to compete is guaranteed by the market mechanism itself. Competition, both actual and potential, is the key economic force by which the market polices itself, warranting freedom to trade. Any market power is only temporary: whenever a business obtains, by either luck or merit, a supra-competitive profit, free entry brings profit back to the competitive level. No market position is in fact permanent or safe under freely competitive conditions; everything is fluid and subject to change under competitive pressure. Both free entry and market atomization highlight the horizontal character of competition: free competition is a market structure characterized by multiplicity and free entry of firms all placed at the same level of the production and marketing chain. The magic of free competition is that it guarantees everybody’s freedom to trade while at the same time rewarding with temporary extra gains those smart enough to get them. Competition as freedom to trade is also the gist of the most popular reading of the competition principle. The idea that competition is “a good thing” because it enhances public welfare, disperses any concentration of power and guarantees equality of opportunities as well as efficiency-improving incentives, is perfectly embodied by the notion of a freely competitive market structure. Not, or not necessarily, in the formal sense of the neoclassical ideal of perfect competition, but in the more concrete sense of a market of relatively small firms devoid of significant barriers to entry or other anti-competitive constraints – what pre-WWII economists sometimes called pure competition (see e.g. Chamberlin 1933, 6; Clark 1940, 244). Competitive forces may stop functioning in two cases. The first is when the state disturbs their working by hindering either actual or potential competition, or both. The most general form of government interference is the creation of an artificial privilege or constraint, i.e., an obstacle to the freedom to trade. In those cases, some wealth exists that only certain individuals designated by government acts can gain and that, conversely, all other individuals are legally prevented from acquiring. The second hindrance to freedom to trade may arise from the market itself, whenever, contrary to the general principles of free competition, a business becomes so powerful that competition, both actual and potential, cannot effectively work against
2
To borrow Justice Rufus Peckham’s dictum in United States v Trans-Missouri Freight Association, 166 U.S. 290 (1897), at 323. More on this case below.
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it anymore. As is well known, due to technological and organizational factors, this was an ever more frequent situation in the American economy of the Gilded Age. Familiar as it may be, the structural/horizontal characterization of free competition is not the only one. Another common view of free competition also focuses on the idea that individuals should be totally unconstrained in pursuing their economic activities, but emphasizes the vertical dimensions of contract and exchange, rather than the horizontal ones of atomization and free entry. Competition is free, then, when the utmost freedom of contract is guaranteed. By freedom of contract is meant the possibility for any individual to bargain about her own property rights without any hindrance or constraint. The notion stems directly from the legal protection of property rights, including the right to the value of property itself. Since value is determined in the market and materializes through exchange (viz., contractual activity), property is truly protected only when the individual is free to enter any kind of contract she deems proper to reap the value of her property. John Stuart Mill captured all this in the following definition: “The right of property includes then, the freedom of acquiring by contract. The right of each to what he has produced, implies a right to what has been produced by others, if obtained by their free consent; […] to prevent them from doing so would be to infringe their right of property in the product of their own industry” (Mill 1909 [1848], II.2.3). Buyer-and-seller bargaining involves agents placed at different levels of the supply-and-demand chain. Hence, depicting free competition as freedom of contract highlights the vertical character of competition. This, rather than the structural/horizontal dimension, was the image of competition classical economists primarily emphasized. For them competition meant first and foremost the contrast of interests between buyers and sellers, each trying to get the most from the bargain. Bargaining activity had indeed a specific analytical function to play in classical models, namely, to bring market price to its normal, or natural level, via the rivalry between buyers and sellers – viz., their effort to “buy cheap and sell dear”.3 Still, the notion of free competition as full contractual liberty transcended economics and drew most of its attractiveness from higher values, such as the classical liberal goals, nicely exemplified by Mill’s words, of enhancing personal freedom and autonomy and ensuring complete control over the fruits of one’s own labor. It was mainly because their political economy put at center stage these liberal values that classical economists granted so great an importance to vertical buyer/seller relations and, consequently, to the freedom-ofcontract version of free competition. The normative superiority of the Smithian system of natural liberty4 as 3
“The capital of a wholesale merchant, on the contrary, seems to have no fixed or necessary residence anywhere, but may wander about from place to place, according as it can either buy cheap or sell dear” (WN II.5.14). Also see WN IV.2.30. The slogan was not only Smith’s: “Finally, there is competition between the buyers and the sellers: these wish to purchase as cheaply as possible, those to sell as dearly as possible” (Marx 1933 [1847], 21). 4 In the Wealth of Nations Smith famously described “the obvious and simple system of natural liberty” in the following terms: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society” (WN IV.9.51).
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the only social system capable of guaranteeing justice and wealth at the utmost degree, and of which free competition was an essential ingredient, thus provided a strong motive for extolling freedom of contract. The only proviso limiting an individual’s contractual liberty was the necessity to preserve someone else’s equivalent liberty. Thus, classical liberal economists and jurists admitted as the only exception to freedom of contract the Latin dictum sic utere tuo ut alienum non laedas, a common law maxim that after the Civil War had become the cornerstone of police power jurisprudence in the US.5 For the rest, freedom of contract ought to reign undisturbed, as a precondition for competition to be truly free. This, as we argue below, was the characterization of the principle of competition shared by the Supreme Court that first affirmed it in an antitrust case. Competition - read first and foremost as freedom of contract - was “a good thing” because it promoted the virtues of the classical system of natural liberty.
2. Never forget corporate law!
Movement antitrust calls for a return to the “original intent” of the 1890 Congress, dismissing Bork’s idea that Congress designed the Sherman Act as a consumer welfare prescription. Legislative history, it is claimed, shows that the antitrust statute was enacted to safeguard American society, not just its economy, against the rising concentration of economic power, which during the Gilded Age took the form of industrial trusts. Fears of the undesirable economic, and eventually political, effects of big business’s power were the common ground for Congress support of the Act. The true vision underlying the new law, Bork’s critics argue, was therefore that antitrust should help protect the Republic, by dispersing economic power, fighting its abuses, and guaranteeing diversity and market access (see e.g. Khan 2017, 739-40; Fox 2013, 2157). This vision, the argument continues, encompassed a variety of more specific ends. For sure, Congressmen wanted antitrust law to prevent large firms from extracting wealth from consumers and competitors in the form of monopoly profits. However, even the focus on wealth transfers was not solely economic. Though the harm was registered through an economic effect, the underlying complaint, and so the new statute’s true goal, was more political than material. Ditto for the other goal of preserving the small businesses’ opportunity of entry and survival in the marketplace. Congress saw independent entrepreneurs as “the heart and lifeblood” of the American economy, while freedom of economic activity - a.k.a. freedom to trade - and the availability of market opportunities were deemed “central to the preservation of the American free enterprise system” (Fox 1981, 1154). In short, according to movement antitrust, the 1890 Congress realized that the multiple goals of protecting consumers and competitors from monopoly abuse, preserving open
5
Herbert Spencer’s Law of Equal Freedom provided a popular modern formulation: “Every man has freedom to do all that he wills, provided he infringes not the equal freedom of any other man” (Spencer 1851, 103, original emphasis). In the concluding § I will deal with John Stuart Mill’s version of the same principle.
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markets, and dispersing economic and political power could all be pursued with a single tool, competition. “The competition process” was accordingly viewed as “the preferred governor of markets”. Federal legislators believed that “[i]f the impersonal forces of competition, rather than public or private power, determine market behavior and outcomes, power is by definition dispersed, opportunities and incentives for firms without market power are increased, and the results are acceptable and fair” (ibid.). The belief that, as Stucke & Ezrachi (2017) put it, competition is the best tool to take economic and political power off the hands of the few and foster greater opportunities for the many to compete and improve their lot was the gist of the competition principle. The Sherman Act enshrined that very principle in American law, where it has reigned supreme until the rise of the Chicago School. Its most assertive formulation was perhaps that by the 1958 Supreme Court, which in Northern Pacific R. Co. v. United States (356 U.S. 1) proclaimed that the Act “was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade” and that “[i]t rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conductive to the preservation of our democratic political and social institutions.” (at 4). Alas, movement antitrust’s historical account of Congressional intent is at best incomplete. The rise of business concentration and industrial trusts in late 19th-century America triggered different reactions. Not all of them were negative. Legal scholars, economists and the press viewed it as, alternatively: a dangerous event that should be stopped at all costs in order to preserve the viability of a competitive and more equal economy; a negative but temporary phenomenon that market forces – if unobstructed by government interference – would automatically defeat; an inevitable and largely positive evolution that would lead to a new era of scale-induced lower production costs and intense technical progress. Above all, and regardless of their different evaluations of the phenomenon, all commentators first looked at corporate law to handle it. Antitrust law would only emerge in a second phase, as a novel approach in the wake of corporate law’s failure. Movement antitrust is therefore right in stressing the heterogeneous goals pursued by the 1890 Congress, but it is wrong in arguing that Congressmen viewed competition as the privileged tool to achieve them all. First and foremost, the trust problem was dealt with as a matter of corporate law. The Supreme Court itself exploited the possibility offered by corporate law to hinder the movement towards business consolidation.6 Late 19th-century corporations still derived their powers from the stategranted charter of incorporation. Hence, when corporations, in order to combine their businesses, made ultra vires transfers of their franchises or property, a judge could affirm that public interest in preventing the unauthorized exercise of corporate powers - such as, per the common law, the unlawful creation of a
6
See McCurdy 1979, 319-20.
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monopoly or other restraint of trade7 - outweighed the private interest of contracting parties. This is what happened in 1890, when the Supreme Court unanimously held that, given the open intention of the partner corporations “to prevent competition and to create a monopoly”, strong legal ground existed “for holding that the contract between the parties is void, because in unreasonable restraint of trade”.8 Crucially, however, the Justices averred that the restraint of trade itself did not “require separate consideration”, because its unlawfulness stemmed from the more fundamental principle that “a corporation should not transcend the powers conferred upon it by law” (Pullman, at 48). In short, the ultra vires doctrine of corporate law sufficed for proscribing combinations, with no need to examine the anti-competitive nature of the agreement. This jurisprudential approach would deeply affect congressional debates on the Sherman Act. As a matter of fact, Gilded Age corporations considered charter-based impediments of this kind as a serious hindrance to consolidation. Hence, they changed tactics, turning to the old common law device of the trust precisely to evade such limitations.9 Though it did not exhaust the catalogue of legal formats a combination could take,10 the corporate trust was undoubtedly the one that most negatively impressed the public opinion. Yet, not even the trust was totally safe from the reach of corporate law. For example, corporate acts addressed to creating a monopoly were still beyond what state-granted charters allowed, if only because of the traditional anti-monopoly attitude of the common law. Ditto when a corporation transferred its franchises and other delegated powers to another. These acts automatically justified a legal action.11 Successful actions in highly visible cases at state level, like those against the New York sugar trust and Ohio Standard Oil, indicated to state attorneys the existence of a straightforward procedure for busting corporate combinations. The joint operation of the common law’s anti-monopoly penchant and of standard corporate law could thus suffice to counter the ascent of industrial consolidation. “By the late 1880s”, Cardozo professor Charles Yablon writes, “the trusts were in serious trouble. There was strong and growing public sentiment against them, which would lead not only to passage of the Sherman Act (whose scope and effect would remain uncertain for many years), but the more serious and immediate threat of state proceedings, initiated by state Attorneys General, seeking either to dissolve the trusts directly or cause forfeiture of the charters of their participating corporations” (Yablon 2007, 338). As in New York and Ohio, most of these state suits ended positively. Yet corporations found still another way to evade control. This famously happened when New Jersey amended its corporate law, the most important changes coming first in 1889 and then in 1896. The new 7
For the evolution of the common law of monopoly and restraints of trade, which by the late 19th-century had turned, in Britain and the US, into a protection of competition in the classical sense of freedom of contract, see Giocoli 2014, Ch.2. 8 Central Transportation Co. v. Pullman's Palace Car Co., 139 U.S. 24 (1890), at 52-3. 9 A corporate trust was an agreement among individual business owners to transfer their stocks to a separate entity, the trust, directed by a board of trustees who held its quotas through certificates of property. The first corporate trust was created in 1882 by Standard Oil, but as a legal tool for managing property the trust was much older. 10 For instance, other forms of corporate trusts that were used at the time, like the asset-transfer combination and the holding company (Hovenkamp 1991, 249-66). To these we may add, as alternative ways of combining separate businesses, the cartels and many other looser forms of non-competitive agreements. 11 See Hovenkamp 1988, 1671.
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version of the New Jersey Corporation Act characterized the corporation as a contractual arrangement among individuals, which could be freely made in pursuit of any lawful aim and which could be governed by any rules to which the parties agreed; an arrangement, moreover, from the formation and control of which government interference was implicitly excluded. Accordingly, the Act permitted incorporation for “any lawful business or purpose whatever” and allowed ownership by a corporation of another corporation’s shares. In short, New Jersey corporate law sanctioned that no difference existed between what a corporation and an unincorporated business could lawfully do, the former being simply a convenient device to organize economic activity. The revision of New Jersey Corporation Act, followed by the rapid capitulation in the same direction of many other legislatures, doomed state efforts to use corporate law to regulate business consolidation. While the new legal environment validated the views of those (corporate lawyers, economists, opinion leaders) who saw consolidation as inevitable, it triggered, as a reaction, a U-turn in the fight against business concentration. “While nineteenth-century Americans regulated corporate structures and left trade regulation issues to the law of contract”, historian Charles McCurdy remarks, “twentieth-century Americans relaxed structural restraints on corporate operations and vested public officials with a roving license to prosecute business-men whose private agreements violated an ever-growing body of legislative standards” (McCurdy 1979, 307-8). The Sherman Act was the most significant among these standards. Borrowing Herbert Hovenkamp’s terminology,12 we may say that the first phase of the fight against the trusts was conducted according to a structural approach, using as a weapon the assortment of statutory and common law rules that formed state-based corporate law. The rationale was to allow state legislators to construct the market structure of their choice in the different industries, using their powers to generate the preferred mix of competition and monopoly. Clearly, those rules were not designed to advance competition and were ill-suited to promote efficiency. Indeed, such a managed approach was orthogonal to any proper understanding of the competition principle. The structural model became untenable after New Jersey’s reform. But even before that, the presence of multiple rules in different states, as well as their doubtful compatibility with the Commerce Clause of the Constitution, triggered legal controversies that hindered the efficient operation of any business active at an interstate level. These very same problems also made it hard to pursue the variant of the structural model devised by the 1890 Congress, the overall design of which was, as we detail below, to curb monopoly power by the joint action of state corporate law(s) and a federal antitrust statute based on an extended and reinforced version of the common law prohibitions of restraints of trade and monopolization. By this solution, Congress tried to secure the advantages of the structural approach and the flexibility brought by the alternative, behavioral
12
See Hovenkamp 1991, 244.
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approach, according to which the federal law should follow a crime-tort pattern to enjoin some specific manifestations of business power, but for the rest leave competition free to work its magic. Devoid of express Congressional backing13 and undermined by the liberalization of corporate law at state level, the structural approach could not survive, leaving antitrust law alone in fighting big business within a (barely sketched) behavioral approach. However, the Sherman Act had not been expressly engineered for such a task. An Act that had not itself been written to promote the competition principle, if not as a residual possibility after state legislators had shaped their preferred industrial structures, suddenly came to be read as if this was its expressed goal. That the Sherman Act had to carry solely on its shoulders the entire burden of the battle against big business speaks volumes about the troubled history of its enforcement.14 The troubles indeed began as soon as the Supreme Court read the competition principle into it.
3. Senatorial competition
The common law of contracts in restraint of trade was the main reference for the framers of the Sherman Act. The Act’s wording, with the use of common law terms like “restraint of trade” and “attempt to monopolize”, is self-explanatory in this regard. However, the common law roots of the 1890 statute do not tell the whole story of its enactment, nor suffice to answer the most basic question arising in the courts called to enforce it, namely, whether the Act embodied or superseded the common law. Should the offenses identified in the Act, namely, contracts, combinations and conspiracies in restraint of trade (as to section 1) and monopolizing attempts (as to section 2), be given the traditional common law explanation, or did the new statute redefine them in a substantive sense? If the latter, should the new reading be driven by the competition principle? Congressional debates on the Sherman Act provide mixed answers to those questions. As we shall see, the competition principle played at most an ambiguous role in the enactment of the new statute. What is sure, though, is that the debates validate our dichotomic characterization of free competition. Records show that both views, freedom of contract and freedom to trade, were openly on the table. The eventual outcome was an Act that featured elements of both. By adopting the common law language, it endorsed the freedom of contract approach that, inspired by classical political economy, had come to dominate the late 19th-century common law of contracts in restraint of trade (including combinations). But the Act also contained elements of the alternative approach, that is, of the idea that only court interventions could restore the proper working of competition in the face of excessive market power. In particular, by making violations actionable by either
13 14
Such as, for instance, a federal incorporation law. See Crane 2011, 14.
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third parties or the government and by establishing civil and criminal sanctions against violations, the Act marked a sea-change with regard to traditional common law, procedurally speaking. Congress turned to the trust problem in 1888. The electoral platforms of both major political parties contained statements indicating opposition to industrial monopolies. Accordingly, in the first session of the 50th Congress the House of Representatives instructed its Committee on Manufactures to conduct a study of the combination movement. Initial attitudes were in favor of federal intervention because states seemingly lacked sufficient powers to check the growth of business concentration.15 However, by the time the House Judiciary Committee was ready to report out a bill, the above-mentioned cases in Ohio and New Jersey, grounded as they were on the violation of the ultra vires principle of corporate law, had established the states’ formal competence, and effective control, on the issue. This circumstance will be crucial in the process leading to the statute’s approval. The dichotomy between freedom of contract and freedom to trade provides a useful guide in interpreting the debate in the US Senate.16 As is well known, the enacted version of the Sherman Act was not authored by Ohio Senator John Sherman, but mainly by Vermont Senator and prominent corporate lawyer, George Edmunds, chairman of the Senate Judiciary Committee.17 It is not simply that the statute should more properly be called the “Edmunds Act”. The real point is that the difference between Sherman’s various proposals and Edmunds’s final version sensibly qualifies the statutory role of the competition principle. Sherman’s original bill, titled “A Bill to declare unlawful trusts and combinations in restraint of trade and production”, had been drafted on the assumption that the states were “unable to deal with the great evil that now threatens us”, the rise of industrial concentration. The Ohio Republican warned his colleagues against the trust-builders’ ability to evade the jurisdiction of state courts. It was up to Congress, therefore, to employ federal powers to dissolve combinations “extend[ing] to two or more States”, while state officials should continue to police the charters of those active within a single jurisdiction. No doubt existed as to Congress’s constitutional power in the field because the effect of trusts was to “restrain commerce, turn it from its natural courses, [and] increase the price of articles”. All these activities, Sherman suggested, negatively affected interstate trade in the same way as a bridge obstructs interstate navigation or a state tax impedes the free circulation of goods – two realms where Congress’s power was undisputed.18 With words that find echo in modern movement antitrust, Sherman called his proposal “a bill of rights, a charter of liberty,” and stressed its importance in political terms. He famously proclaimed: “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat
15
See McCurdy 1979, 323. See Peritz 1996, Ch.1. The whole debate is reproduced, with just a few lacunae, in Bills and Debates in Congress Relating to Trusts, 1888-1902, from which all the following quotations are drawn. 17 For a more detailed reconstruction of the episode, see, among many, Letwin 1965, 93-5; McCurdy 1979, 325-6. 18 See e.g. Sherman, Bills and Debates, 105. 16
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of trade, with power to prevent competition and to fix the price of any commodity.” Clearly, he thought freedom was at stake - a freedom that was not only economic, but mainly political. Sherman understood that concentration of economic power also consolidates political power. This would happen whenever an enormous wealth, amassed through economic power, would be turned to influence government, undermining business and individual freedom, and thus democracy itself. As another Senator, George Hoar of Massachusetts, put it, monopolies were “a menace to republican institutions themselves.” Despite his skepticism about the possibilities of state corporate law, these is not doubt however that Sherman had in mind the structural model of antitrust, i.e., a direct control over market structures by federal and state governments. Much as a government could decide whether and where to build a bridge, so it should be allowed to determine the extent of competition in a given market. And exactly like unobstructed navigation, or tax-free commerce, so free competition - to be read here as freedom to trade - should be the default mode of operation. Accordingly, all of his proposals – he made three of them, between August 1888 and March 1890 – contained (a version of) the following statement: “That all arrangements, contracts, agreements, trusts, or combinations between persons or corporations made with a view, or which tend to prevent full and free competition in the production, manufacture, or sale of articles of domestic growth or production, […] and all arrangements, contracts, agreements, trusts, or combinations between persons or corporations designed, or which tend, to advance the cost to the consumer of any of such articles, are hereby declared to be against public policy, unlawful, and void” (Bill and Debates, 8, emphasis added).19 We may thus safely recognize Sherman as an early champion of the competition principle. Moreover, this wording placed his bill firmly within the freedom to trade rhetoric. Both the notions of “full and free competition” and that of consumers paying the cost of anti-competitive behavior could find no place in the late 19th-century common law approach to restraints of trade. They were, on the contrary, consistent with a characterization of antitrust as committed to defend and promote competition as “a good thing”, antithetical to economic and, eventually, political power. The point is that Sherman’s bill met a less-than-friendly reception in the Senate. Doubts arose about both the constitutionality and the necessity of so sweeping a reform.20 Several senators contended that Sherman’s equation of the trusts’ impact on interstate trade with other kinds of interference, like obstruction to navigation and state tax barriers, was legally unfounded, given the Supreme Court’s consolidated distinction between transportation and manufacturing. Others asserted that, far from being helpless, states had recently demonstrated in high-profile litigations their legal capacity to handle structural problems caused by giant combinations. Be it as it may, the enacted version of the statute would contain little of Sherman’s own wording, including no mention at all of the term “competition”. Senator Edmunds would draft it explicitly in the then-standard common law language of contracts, combinations and conspiracies in restraint of trade
19 20
Further details on Sherman’s bills can be found in Letwin 1965, 87-91, and Sklar 1988, 107-9. See McCurdy 1979, 324-5.
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and of monopolizing attempts. Were it not for its revolutionary procedural provisions, which remained as the only surviving part of the original proposal, the Act could be plainly interpreted according to the common law doctrines of property rights and freedom of contract typical of English and American courts of the time, which had little to say about competition as freedom to trade. The congressional debate triggered by Sherman’s proposal illustrates the division between the two camps.21 Sherman and other supporters of the original bill emphasized two negative consequences of combinations: harm to industrial liberty and harm to consumers. The former threat struck at the idealized image of a country of small, independent entrepreneurs, viz., of a fluid and atomistic economy of small businesses, none of which endowed with significant market power. The latter struck at the possibility of consumers escaping from high prices by turning to alternative producers. Taken together, these two harms led to an even more dangerous threat against social and political liberty. Evoking the republican ideal, Sherman emphasized how an economically independent citizenry was the cornerstone of representative government. Competitive equality in the marketplace was therefore crucial to preserve not only economic, but also political liberty and, ultimately, democracy itself. Failure to answer the citizens’ demand for congressional action against the combination ogre would risk opening the door to “the socialist, the communist, and the nihilist” (Sherman, Bills and Debates, 101). Remarkably, the opposing camp was not manned by naïve believers in the power of laissez faire to destroy monopoly and bring Heaven on Earth. Most of those against Sherman’s proposal believed that “full and free” competition could be as dangerous as combination and that only private agreements could mitigate the effects of destructive competition. In other words, they subscribed to the anti-classical view of the so-called “new school” of American economists,22 according to whom the new economic order of large-scale industrial processes, business concentration and monopoly were the inevitable, and possibly even beneficial, products of competition, its natural evolutionary outcome. This result could not, and should not, be hindered by the government or the law. Many senators thus believed that, by preserving the most complete freedom of contract, the law could favor not only competition, but also, if not primarily, the other, equally natural outcome of the new industrial era, namely, the birth of private agreements and combinations as a safeguard against the most destructive effects of competition itself. Still like most young American economists of the time, these Congressmen thought that industrial liberty was not synonymous with unrestrained competition; in other words, that “unrestrained competition is not free competition”, as law historian Rudolph Peritz put it (Peritz 1996, 16). According to this view, competition could only be termed “free” when market participants could exercise their most complete contractual freedom, including the freedom to voluntarily restrain one’s own market opportunities. The law should aim at preserving that freedom by proscribing only those contracts and
21 22
For a more complete analysis, see Letwin 1965, 85-99; Sklar 1988, 105-17; Peritz 1996, 14 ff. On the “new school”, see e.g. Yonay 1998.
13
practices that curtailed it, i.e., that coerced an individual into adopting a behavior he would not voluntarily choose. But this was precisely the approach of the late 19th-century common law of contracts in restraint of trade. An approach, note well, which only a cursorily identification of competition with freedom to trade could characterize as anti-competitive, but which at closer scrutiny was consistent with the classical view of competition as freedom of contract. Freedom of contract, that quintessential feature of classical political economy and the pillar of late 19thcentury common law, thus provided the rationale for those who rejected any outright condemnation of business concentration and were ready to consider it as a natural, possibly beneficial evolution of market forces. No contradiction existed between adopting classical principles, including the desirability of the utmost contractual liberty, and believing that new technological conditions had made the classical competitive order simply unthinkable. At the same time, it was perfectly possible to endorse freedom of contract as a constitutional principle, a common law doctrine and a milestone of classical political economy, while belonging to the opposing camp of those who believed that the economic and political threats raised by business concentration outweighed its alleged benefits. The extent of the common ground provided by classical notions is revealed by what both camps extolled as a key benefit of the market system, namely, the guarantee of a “fair price”. The true yardstick for assessing the desirability of a given price, as well as a mantra of modern movement antitrust, fairness meant for 1890 Congressmen not only that consumers ought not to be exploited by trusts, but also – indeed, especially – that “every man in business” ought not to be deprived of his “legal and moral right” to a “fair profit”.23 None denied that businessmen were entitled, as anyone else, to a fair price embodying the “just” reward for their honest work, where “just” was intended in the legal, and classical, sense of respecting the property rights on the fruits of one’s own labor. “The true theory on these matters”, Senator Orville Platt proclaimed, “is that prices should be just and reasonable and fair, that prices, no matter who is the producer or what the article, should be such as will render a fair return to all persons engaged in its production, a fair profit on capital, on labor, and on everything else that enters into its production” (Platt, Bills and Debates, 295). Compare Platt’s words to those put forward by Renata Hesse, Assistant Attorney General at the Antitrust Division, in a 2016 speech that openly tried to encompass some of movement antitrust’s claims: “Animating the beliefs of ordinary Americans who demand vigorous antitrust enforcement are the value of fairness and the belief that properly functioning competitive markets are themselves fair. To say it another way, competition is fair because it gives a chance to the small business owner to succeed in her business venture, because it delivers lower prices to consumers, and because it drives the innovation that improves products, business processes, and more” (Hesse 2016). Records show that both factions involved in the 1890 debate
23
Connecticut Senator Orville Platt used these words while debating the final version of Sherman’s proposal: see Bills and Debates, 297. As noted by Hovenkamp, the emphasis put on this specific notion of fairness, when juxtaposed to the proclaimed goal of protecting consumers, represents a weak point of movement antitrust’s platform: see Hovenkamp 2018, 3.
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would endorse these, as well as Platt’s, words. But only one side would assent to the rest of the Senator’s statement. The two factions split again when it came to determining what the law and the government could do to guarantee the actual fairness of market prices. Sherman and his allies believed that a fair price could only be achieved when conditions of “full and free competition” prevailed in the marketplace. That is to say, when the competition principle, to be read as perfect freedom to trade, was allowed to reign supreme. Hence, the law should strike at combinations like, say, price-fixing cartels, which generated an unjustly high reward for their members at the customers’ expense. The opposing camp emphasized, as did also many economists of the time, the losses caused by excessive or ruinous competition, and saw combinations, including cartels, as voluntary contracts aimed at establishing fair prices and fair profits. The law should not prohibit these combinations, unless they undertook practices imposing unfair conditions upon someone else.24 Platt belonged to the latter camp. Unsurprisingly, he attacked “the theory of [Sherman’s] bill” for entailing that “no matter how much the price may have been depressed, no matter how losing the business may be, the parties engaged in it must have no understanding between themselves by which they will come together and say that they will obtain a fair and fairly remunerative price for the article which they produce. That is wicked, the bill says” (ibid., 295-6). For those on Platt’s side, no law should interfere with a businessman’s effort to defend his right to a fair profit. This was the logical consequence of considering that “right” as part of his property, i.e., itself a property right. As such, it should be in the owner’s full and free disposal. As such, it was constitutionally protected by the Fourteenth Amendment and no federal statute should violate it. The blending of contractual freedom with property rights’ rhetoric made Platt’s the winning position, and not only with respect to “fair prices”. Most Congressmen saw in the combined action of corporate and common law an adequate weaponry to protect the American economy from both dangers – unrestrained combination and unrestrained competition. Accordingly, they relegated the Sherman Act to a supporting role. The phrasing of the first two sections in Edmunds’s enacted version of the bill mirrored this view. His recourse to familiar common law wording for defining statutory liabilities bears witness to Senate “reaction against the original bill’s explicit and unmediated imposition of ‘full and free competition’ as the only natural and legitimate form of commerce” (Peritz 1996, 20). And, accordingly, also against any plan to make the competition principle the law of the land. Indeed, it may even be argued that the main outcome of the Senate debate over Sherman’s proposal was to establish the constitutional limitation of any federal action against corporations and industrial concentrations. The Senate concluded that Congress “lacked the authority to vest federal officials with a roving license to ‘bust’ state-chartered corporations” (McCurdy 1979, 326). Still, in the debate about the final draft, no Senator attempted to specify exactly what the federal authorities’ role should be in fighting the
24
For example, a conspiracy to boycott a rival who refused to join the cartel should be declared unlawful because it coerced the rival’s freedom and caused him unfair losses.
15
trusts. Presenting the Judicial Committee’s outcome, Edmunds simply explained that the bill incorporated traditional common law categories and that Congress ought to leave courts free to determine the categories’ concrete applicability on a case-by-case basis.25 An almost unanimous Senate voted the bill as proposed by the Committee, with a new title: “A Bill to protect trade and commerce against unlawful restraints and monopolies”. As a courtesy to Senator Sherman, the Act retained his name, although its substantive content had been upset and notwithstanding Sherman’s own complaint that the final version was “totally ineffective in dealing with combinations and trusts. All corporations can ride through or over it without fear of punishment or detection”.26 What did these historical facts entail for our narrative? A thorough reading of the debate shows that, by enacting an antitrust law, Congress did aim at several economic and non-economic goals, as supporters of movement antitrust rightly claim. Among them, the prevention of “unfair” transfers of wealth from consumers to big business, and the related defense of the “competitive norm”, have been identified long ago by law scholar Robert Lande as perhaps the most important.27 “Congress regarded the competitive scenario as the normal one”, writes Lande. “Monopoly pricing represented a change from the norm which Congress condemned as an ‘unfair’ taking of consumers’ property” (Lande 1982, 76). The idea that in the classical system of natural liberty any “unfair” distribution of wealth means a “non-natural” distribution, i.e., one inconsistent with natural liberty itself, and that, accordingly, the only “natural” and, therefore, “fair” distribution is that implemented in the system of natural liberty, i.e., when the “competitive norm” rules undisturbed, is indeed crucial in the following sections. However, the legislative outcome also shows that no explicit or implicit notion of the natural, normative superiority of competition featured in the enacted version of the Sherman Act. Indeed, it seems not so relevant which goal, if any, drove the approval. Thoroughly reshaped by Edmunds, the Act sounded like a mere federalization of the common law of contracts in restraint of trade, with no direct reference to competition, let alone its being “the norm”. Movement antitrust is therefore wrong in tracing the competition principle back to the 1890 statute. The question then arises: if it was not in the enacted text, when did the competition principle affirm itself in American antitrust law? The answer, as I explain below, is somehow surprising, at least for those accustomed to stereotypical accounts of Progressive Era law history.
25
Edmunds, Bills and Debates, 315. So Sherman declared to the New York Times: see Letwin 1965, 94. 27 According to Lande, Congress did pass the Sherman Act to pursue a wholly economic objective; however, it was a distributive, rather than allocative, objective. “Congress was concerned principally with preventing ‘unfair’ transfers of wealth from consumers to firms with market power”, he wrote (Lande 1982, 68). To prevent that, Congress sought “to promote the distribution of wealth that competitive markets would bring” (ibid., 70). This however not as a matter of economic efficiency, but as one of sheer property rights, because “Congress decided that consumers were entitled to the benefits of a competitive economic system”, the latter being regarded as the “norm” that big business was infringing (ibid., 76). 26
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4. A literal shock
The Supreme Court’s 5-to-4 decision to reverse the lower courts’ acquittals in United States v. Trans-Missouri Freight Association (TMFA) was a landmark moment in the history of American antitrust law.28 The case concerned an agreement entered into by a number of railroad companies to fix uniform rates and terms of freight carriage. Lower courts had twice sanctioned the agreement, declaring, first, that the Sherman Act should follow the common law, including the distinction between reasonable and unreasonable restraints, and, second, that the Act did not aim at preserving competition as such. In the words of Kansas District Court Judge Riner, “the public is not entitled to free and unrestricted competition, but what it is entitled to is fair and healthy competition” (TMFA District Court, at 456). This being the accepted reading of the antitrust statute, the Supreme Court’s verdict came as a real shock.29 For the first time the Court construed the Sherman Act as recognizing no distinction between reasonable and unreasonable restraints of trade, thereby superseding the common law of contracts in restraint of trade. Writing for the narrow majority, one of the Court’s most conservative members, Associate Justice Rufus Wheeler Peckham, the same Justice who a few years later would pen the (in)famous Lochner opinion, declared that the Sherman Act aimed at canceling and replacing the common law, starting with the distinction between reasonable and unreasonable restraints. Peckham built on a simple, literal reading of the Act — hence the name literalists given by law historians to the faction of the Court that joined him in the majority. “The language of the act”, he wrote, “includes every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations. So far as the very terms of the statute go, they apply to any contract of the nature described. A contract, therefore, that is in restraint of trade or commerce is, by the strict language of the act, prohibited” (TMFA, at 312), and not just, the opinion also read, “that kind of contract which was invalid and unenforceable as being in unreasonable restraint of trade” (ibid., at 328). It followed that a price-fixing agreement like that established by TMFA defendants was unlawful, regardless of the reasonableness of the established prices. The majority detached itself from previous jurisprudence under another respect. The TMFA Court also came first to acknowledge that the only “fair” prices are competitive prices, a.k.a., the competition principle.30 To further his literal reading, Peckham indeed declared the impossibility of determining whether any agreed price be reasonable. Why? Because, he argued, only competitive prices are reasonable: “Competition, free and unrestricted, is the general rule which governs all the ordinary business pursuits and transactions of life” (ibid., at 337). This categorical statement about the merits of “free and unrestricted 28
United States v. Trans-Missouri Freight Association, 166 US 290 (1897). See Sklar 1988, 127. 30 The principle already featured prominently in the dissent that Judge Oliver Perry Shiras had penned against the decision by the Court of Appeals to acquit the cartel. Shiras proclaimed that “the community is absolutely entitled to the protection against unfair rates which is afforded by free and unrestrained competition” (TMFA Court of Appeals, at 90). Shiras’s dissent contained several other elements that would play a key role in Peckham’s opinion for the Court. See Giocoli 2015, Ch.10. 29
17
competition” seemingly vindicated Sherman’s original bill. Absent from the Act’s final text, the competition principle found its earliest formulation in TMFA and has been a pillar of US antitrust law ever since. Beyond establishing competition as “the norm”, the TMFA Court also expressed the dread of the sociopolitical consequences of an excessive concentration of economic power. Like Sherman and his faction, Peckham viewed rivalry among roughly equal firms of relatively small size as the bedrock of the American system. With words that would become a battle cry for future supporters of a political - rather than strictly economic - interpretation of antitrust law, the Justice averred that powerful combinations in restraint of trade could drive out of business “the small dealers and worthy men whose lives have been spent therein”, turning each of them from “an independent businessman, the head of his establishment, small though it might be, into a mere servant or agent of a corporation” (ibid., 323-4). Only “free and unrestrained competition” could effectively rein in economic power. The competition principle played still another role in TMFA. Many at the time - including several prominent economists - held the view that competition could be destructive, especially in industries with huge fixed costs like railroads. An authority like Cornell professor Jeremiah Jenks for instance declared that, under particular circumstances, “competition will eventuate, not in the elimination of some few while the majority are still making profits, but rather in a depression of the entire business, so that only the very few most skilful or best situated will be making any profit at all, while the others still struggling along may be losing money for a long period before they finally yield. Indeed, the result may well be that for a considerable length of time all will be running at a loss” (Jenks 1900, 19). Worse than that, competition in those industries was not only destructive, but it often led to the survival of only one firm, and thus to monopoly and the end of competition itself. An alternative existed, though. Combination, which could take various forms (from loose deals to tight cartels to complex governance structures), entailed an agreement between producers to act as a joint monopoly and set “fair” prices, i.e., non-competitive prices capable of guaranteeing an adequate return on capital to all participating firms, but still lower than what a fully-fledged monopolist in a winnertakes-all market would charge. Railroads’ counsel had invoked exactly this so-called ruinous competition defense to dismiss the charge in TMFA. To counter their argument, Peckham stressed that different views still existed as to the alleged beneficial effects of combination in the railroad industry. It was therefore impossible to determine a priori whether the prices fixed by the combination under scrutiny were reasonable (TMFA, 338-9). But this, he crucially added, was precisely the reason Congress had not distinguished between reasonable and unreasonable restraints and had, at least to his view, enshrined competition as the norm. First formulated in TMFA, the competition principle would find its most classic statement a few years later. Writing for a plurality in another famous antitrust case, Northern Securities,31 the most progressive member of the Court and the true leader of the literalist faction, Associate Justice John Harlan, reiterated
31
Northern Securities Co. v. United States, 193 U.S. 197 (1904). No majority could be reached in the case, but Harlan’s opinion was joined by three other Justices and earned the concurrence of another.
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Peckham’s reading of the Sherman Act. Harlan argued that trusts were unlawful per se: “every combination or conspiracy which would extinguish competition between otherwise competing railroads engaged in interstate trade or commerce, and which would in that way restrain such trade or commerce, is made illegal by the act” (Northern Securities, at 331). Harlan was negatively impressed by the sheer size and ensuing economic power of the merger under scrutiny. However, the competition principle also played a major role in his analysis. Harlan repeated several times that, with the Sherman Act, Congress had prescribed “the rule of free competition” (Northern Securities, at 198, 331, 332, 337). No room existed for legal escapes, such as the ruinous competition defense. “If, in the judgment of Congress, the public convenience or the general welfare will be best subserved when the natural laws of competition are left undisturbed by those engaged in interstate commerce”, he wrote, “that must be, for all, the end of the matter if this is to remain a government of laws, and not of men” (ibid., 199). Given the principle, the outcome of a case like Northern Securities was sealed: “If such combination be not destroyed, all the advantages that would naturally come to the public under the operation of the general laws of competition […] will be lost” (ibid., at 327). Merging a literalist reading with the competition principle, Harlan’s doctrine read the phrase “restraint of trade” of the Sherman Act to mean any direct interference with, or detachment from, free competition. With Harlan’s 1904 words, the competition principle was established for good in American antitrust law. Not surprisingly given the Court’s bitter split in the case, Harlan’s opinion came under his brethren’s fire. The competition principle topped the list of complaints. Even a Progressive hero like Associate Justice Oliver Wendell Holmes strongly dissented from Harlan’s reading of the Sherman Act. Holmes’s dissent was a passionate defense of the traditional common law of restraints of trade against the competition principle. Whence his iconic dictum: “The court below argued as if maintaining competition were the expressed object of the act. The act says nothing about competition” (ibid., at 403). Holmes argued that the real concern of Congress was “the ferocious extreme of competition with others, not the cessation of competition among the partners” (ibid., at 405). Thus, the Act aimed not at promoting “free and unrestrained” competition, but rather at protecting competitors from aggressive exclusionary practices, like predatory pricing or boycotts. Given that the combination under scrutiny had been made voluntarily – none had been coerced into it, nor had suffered any coercion or exclusion because of it – it was perfectly lawful at common law and, therefore, beyond the Sherman Act’s reach. The danger of Harlan’s (and Peckham’s) interpretation was not just that it paved the way to destructive competition. Concern with the socio-political consequences of a misguided antitrust policy was not exclusive to the literalist faction of the Court. As Holmes put it, the Sherman Act should not “be construed to mean the universal disintegration of society into single men, each at war with all the rest, or even the prevention of all further combinations for a common end” (ibid., at 407). Anticipating his even more famous dictum in Lochner v New York that “the Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics” (Lochner,
19
at 75),32 Holmes ended his dissent in Hobbesian tones, warning against “an interpretation of the law which in my opinion would make eternal the bellum omnium contra omnes and disintegrate society so far as it could into individual atoms” (Northern Securities, 411). The very interpretation, we may add, which underlay the reading of free competition as freedom to trade and which, therefore, viewed an atomistic market of small, independent firms as “the norm” antitrust law was called to defend. Surprisingly enough, among the Justices who joined Holmes in the dissent featured Peckham himself. The same Justice who had first invoked the competition principle and had eulogized the “the small dealers and worthy men” was now ready, in the most important antitrust case discussed thus far by the Supreme Court, to subscribe to a reading of the Sherman Act that denied any role to the principle itself and warned against the undesirable consequences of an atomistic marketplace. To further complicate the issue, Holmes and Peckham would famously clash just one year later in the Lochner case, with Holmes writing one of the most famous, and most devastating, dissents of all times to demolish Peckham’s pro-laissez faire opinion. How to explain Peckham’s seemingly schizophrenic behavior with respect to the competition principle? We have reached here a crucial juncture in our story. Contrary to what movement antitrust may claim, not only was the competition principle conspicuously absent from the enacted version of Sherman’s proposal, but it received no univocal reading even by the Justices who first affirmed it in antitrust law. Different views of competition did exist in the turn-of-the-century Court, though not the usual ones underlined by law historians. Traditionally, the fifteen years separating the Supreme Court’s earliest application of the Sherman Act in EC Knight (1895) and the Standard Oil case of 1911 are described in the literature as a period in which the Justices split in two factions, the literalists and the so-called rule-of-reasonists, with the former initially prevailing, but the latter eventually triumphing with Chief Justice Edward White’s formulation of the rule of reason.33 The divide is depicted as grounded on opposite readings of common law’s relation with the Sherman Act, i.e., on our previous “embody or supersede?” question. However, another, complementary split existed in the Court. On the one side we had those like Harlan who proclaimed the absolute validity of the competition principle and argued that antitrust law should always protect and promote “free and unfettered competition”, not only because of the latter’s beneficial economic effects, but, more importantly, because of the dissipation of economic power it guaranteed. In this reading competition meant freedom to trade and, consequently, freedom from economic power. On the other side, featured those like Peckham (and White: see below), whose reading of the competition principle was based on viewing competition as freedom of contract. Finally, we had Holmes’s thesis that the Sherman Act did not aim at establishing competition as “the norm”, but on the contrary at preventing competition itself from inflicting economic and socio-political harm to American society, starting with the undesirable elimination from the market of those “small dealers and worthy men” supporters of both alternative views wished to protect. Significantly, even
32 33
Lochner v New York 198 US 45 (1905). United States v E.C. Knight Co., 156 U.S. 1 (1895); Standard Oil Co. of New Jersey v United States, 221 U.S. 1 (1911).
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Holmes’s dismissal of the competition principle could be considered as faithful to the expressed intent of many of the Congressmen who voted Sherman’s bill into law. A question thus arises for supporters of movement antitrust. When they invoke a return to the competition principle, reading into it the “original meaning” of the Sherman Act and an effective weapon to curb the rising concentration of power (both economic and political) in 21st-century Corporate America, exactly which version of the principle do they aim at? Harlan’s, Peckham’s or, possibly, Holmes’s? Apparently, movement antitrust could endorse at least two of these views. Let antitrust law protect and promote competition in its endless power-destroying activity, à la Harlan. But, at the same time, let antitrust law prevent, à la Holmes, the inevitable effect of competition itself, namely, the survival of the fittest. This potential inconsistency is not big news. It is in many ways a restatement of the old dilemma between protecting competition and protecting competitors. A dilemma often cast as: how should antitrust law deal with a business that is gaining market power because of its superior product or higher efficiency, i.e., by exploiting the very mechanism of competition? Should the law let it “competitively kill” its competitors or should it protect them, if only to avoid the accumulation of market power? The answer of mainstream, welfare-based antitrust is clear cut. The same cannot be said for movement antitrust. In the next section I will argue that a possible way out from the dilemma stems by giving more attention to the third view, namely, Peckham’s one. This by explaining how Peckham was perfectly consistent in his upholding of the competition principle in TMFA and neglect of it in Northern Securities. Before that, however, it is useful to recall how the controversy was solved back then by the Supreme Court. As is well known, a few years after Northern Securities the new rule of reason would settle the issue for good, marking the end of the so-called formative era of antitrust law. Chief Justice White’s Standard Oil (1911) doctrine — to which all other Justices, apart from Harlan, would adhere — would stand for the implicit propositions that, first, good trusts and bad trusts existed; second, that the former could be perfectly lawful even under the Sherman Act; and, third, that competition was not necessarily beneficial but could well be destructive, so much so that even combinations could be a reasonable solution. It all depended, White would underline, on how businesses competed. The solution would build on the freedom of contract doctrine formulated by the Lochner Court, as well as on a return to the traditional common law distinction between reasonable and unreasonable restraints. These legal foundations would allow White to properly qualify the principle of “free and unrestrained” competition without invoking anymore vague notions of fair price or fair profit. Neither trusts nor monopolies were illegal because of their sheer existence or size, but only because of their behavior, i.e., “because of their restriction upon individual freedom of contract and their injury to the public” (Standard Oil, at 54). Crucially, freedom of contract would be elevated to the status of necessary condition for competition to work its magic. This, according to White and an almost unanimous Court, was the correct reading of antitrust law. The Sherman Act, he would proclaim, “indicates a consciousness that the freedom of the individual right 21
to contract, when not unduly or improperly exercised, was the most efficient means for the prevention of monopoly, since the operation of the centrifugal and centripetal forces resulting from the right to freely contract was the means by which monopoly would be inevitably prevented if no extraneous or sovereign power imposed it and no right to make unlawful contracts having a monopolistic tendency were permitted” (ibid., at 62). Freedom of contract, undisturbed by government interference, was the key liberty fostering competition and its various beneficial effects, including the eventual dissolution of trusts brought by market forces themselves. It was upon these grounds that the Standard Oil trust should be enjoined. Liberty of contract is never absolute, as it is limited by the respect of anyone else’s equal freedom. As White would note in the companion American Tobacco case, contractual freedom could be exercised in an abnormal way, by making use of acts or agreements of an “unusual and wrongful character” (United States v. American Tobacco Co., 221 U.S. 106, 1911, at 181), such as predatory pricing, boycotting or cartelization. Unlawfulness stemmed in these cases precisely from the abuse, so to speak, of one’s own contractual freedom to curb other market participants’ freedom. Such behavior represented an obstacle to the normal working of the competitive process. In the specific cases, proof had been reached of Standard Oil’s and American Tobacco’s bad actions against their competitors. Hence, those trusts had unreasonably restrained trade, deserving condemnation. As formulated by White, the rule of reason would be erected upon the newly devised doctrine of freedom of contract and the accompanying, common law-based prohibition of unreasonable exercises of that freedom. Competition did remain “the norm”, as in Northern Securities and TMFA, but only within the meaning and the limits set by the higher principle of contractual freedom, itself an embodiment, per the Lochner Court, of the due process clause of the Fourteenth Amendment and of the constitutional protection of life, liberty and property. Historically speaking, this was the version of the competition principle that the formative era of antitrust law, so often nostalgically invoked by movement antitrust, bequeathed to subsequent enforcers.
5. Justice Peckham’s classical competition
To fully assess Peckham’s competition principle and understand whether it may provide the basis for a modern rebuild of the antitrust enterprise, we need to dig a bit deeper into Peckham’s jurisprudence.34 Despite his bad fame as the despised author of Lochner v New York, Peckham hardly fits stereotypes. Just consider how he was a leading architect of so-called laissez faire constitutionalism and an enemy of
34
But only a bit. In what follows I will for instance ignore the circumstance that what really doomed the TMFA cartel was Peckham’s insistence on Congress authority to interfere with the behavior of companies that, like railroads, enjoyed special government privilege (TMFA, at 322). Regardless of its own worth, this doctrine made TMFA’s conclusion irrelevant for the application of antitrust law against cartelization by ordinary businesses that had no such privilege.
22
Progressive reforms, but at the same time a supporter of the literalist interpretation of the Sherman Act and the Justice who first read antitrust law as a huge weapon against big business and market concentration. That is to say, an arch-conservative bastion and a Progressive forerunner. Let us first dispel a myth surrounding Peckham’s TMFA defense of the “small dealers and worthy men”, whose business was being crushed by powerful combinations. Much has been written about these words. It is undeniable that Peckham was here giving voice to the old American dream of an economy composed of self-employed owners of small independent firms, each of roughly equal size and devoid of significant market power – entrepreneurial republicanism, as it may also be called. Yet, Peckham was hardly a naïve defender of (usually inefficient) small businesses or the ultimate representative of those who, throughout history, have invoked antitrust law to protect competitors rather than competition. A careful reading of the passage itself about the “small dealers and worthy men” suffices to prove that. Indeed, Peckham was not suggesting that minor businesses be protected from competitive forces. He plainly conceded: “In any great and extended change in the manner or method of doing business, it seems to be an inevitable necessity that distress, and perhaps ruin, shall be its accompaniment in regard to some of those who were engaged in the old methods. […] These are misfortunes which seem to be the necessary accompaniment of all great industrial changes. It takes time to effect a readjustment of industrial life. […] It is a misfortune, but yet, in such cases, it seems to be the inevitable accompaniment of change and improvement” (TMFA, at 323). Clearly, what concerned him was not the inevitable ill fate of the small producers unable to keep pace with technical innovations and market forces. What he did complain about was the same outcome occurring not as an effect of genuine competition, but rather as the manifestation of undue market power stemming from combinations and restraints of trade. “It is wholly different”, the passage continued, “when such changes are effected by combinations of capital whose purpose in combining is to control the production or manufacture of any particular article in the market, and by such control dictate the price at which the article shall be sold, the effect being to drive out of business all the small dealers in the commodity […] the result in any event is unfortunate for the country” (ibid., at 324). The sense is clear: the very same sacrifice of the “small dealers and worthy men” that was justified (in fact, socially beneficial) when caused by competition and technological progress became a plain social loss if precipitated by the action of cartels or combinations – if, in modern economic jargon, it originated in the mere redistribution of a given market from the small producers to the combination, rather than in an innovation that increased, at least potentially, the extent of the market. Far from being the nostalgic warden of inefficient ways of doing business, Peckham sounds in this passage like a champion of free competition as the driver towards efficiency and of antitrust law as the weapon to dissolve market power. Still, this passage and, more generally, his 1897 version of the competition principle, may be given alternative readings. One possibility is to follow our previous remark and identify Peckham as a forerunner of the neoclassical approach, emphasizing the welfare-enhancement effect of competition as freedom to 23
trade.35 Another is to focus on entrepreneurial republicanism as a socio-political goal as such, one that Peckham had pursued since his juvenile identification as a Jacksonian Democrat.36 Competition was in this view simply the key to reconciling politics and economics. A core Jacksonian tenet — also echoed by modern movement antitrust — held that excessive market power would eventually turn into illegitimate economic power and, from there, into undue political power, thereby endangering the republic itself. Regardless of its economic merits, competition could avoid all that, by dissolving or tempering market power. Was Peckham’s TMFA opinion simply giving voice to his political views? I claim that a third reading is closer to truth. Yes, Peckham did believe that with the Sherman Act Congress had declared competition as the sole legitimate market “norm”. But, no, not in a wholly Jacksonian, purely political sense, nor in the freedom-to-trade sense of a static, neoclassical market structure. The kind of competition that Peckham read into the new statute was the classical one, where competition was conceived as a dynamic process actuated by the free play of economic forces and, in particular, by the interaction of individuals endowed with the utmost freedom of contract. The classical view of competition was undoubtedly familiar to Peckham. For example, while still a judge in the New York Court of Appeals, he had penned a strong dissent in a regulation case, People v. Budd.37 There Peckham dealt with the theme of monopoly power and its sources like a fully-fledged classical economist would. Two of his arguments in particular had implications that transcended regulation and involved antitrust. First, he claimed that, absent legal impediments to entry, the liberty of individuals to transfer their capital from one sector to another would defeat any attempt to maintain prices above the natural level in any specific industry. This thesis captured Peckham’s, and the classical economists’, faith in the perfect harmony between the defense of individual rights to property and contract and the antimonopoly effect of free entry and potential competition. Second, he noted that this result also held for the case of cartels and other price-fixing conspiracies. While these agreements inevitably limited the participants’ pricing liberty, they were as well exposed to competitive pressure arising from newcomers attracted by supra-competitive returns. Potential competition would prevent cartelization from being a successful priceenhancing strategy, once again conditionally on free entry being unimpeded by legal obstacles. His conclusion in Budd was that statutory price regulation had to be canceled, while business affairs had better be policed by traditional common law rules. Less than a decade later, Peckham’s classical faith in potential competition and the common law to prevent any form of excessive concentrations of economic power was seemingly replaced by a more mundane appeal to the express prohibitions of the Sherman Act. My point is that, while his anti-cartel stance in TMFA stemmed from a newly-acquired awareness of the changing conditions of American industry,
35
A neoclassical reading of Peckham’s jurisprudence has been proposed by Bork 1966 and Hovenkamp 1989 For a critique of this interpretation, see Giocoli 2015, Conclusion. 36 For some biographical detail on Justice Peckham, see Duker 1980; Ely 2009. 37 People v. Budd, 117 N.Y. 1 (1889). For Peckham’s full analysis of the case, see Giocoli 2018.
24
Peckham still stuck to trusting classical competition and its natural, beneficial effects. Only, he thought that in the age of big business competition required specific conditions to properly work. I maintain that those conditions would represent the red line connecting his antitrust jurisprudence to his famous opinions in constitutional cases about substantive due process and freedom of contract, such as Allgeyer38 and Lochner. A passage in another antitrust case is the key to unlock Peckham’s competition principle. Two years after TMFA, he would author the opinion in Addyston Pipe. This time the federal government had challenged a cartel of cast-iron pipe producers that inhibited competition between its members in thirty-six states.39 The case owes its fame to the opinion delivered by then-judge William Howard Taft for the Court of Appeals of the Sixth Circuit.40 As is well known, Taft’s decision to dissolve the cartel did not rely on TMFA literalism, but on an original distinction between direct and ancillary restraints of trade that still constitutes a cornerstone of American antitrust law. Much less famous is Peckham’s opinion for the Supreme Court. While confirming Taft’s conviction of the cartel, Peckham built his conclusion on partially different grounds. To our aims here,41 what matters is a usually neglected sentence towards the end of the opinion. What makes a combination an unlawful restraint of trade, he wrote, “is the effect of the combination in limiting and restricting the right of each of the members to transact business in the ordinary way, as well as its effect upon the volume or extent of the dealing in the commodity” (Addyston Pipe, at 244-5; emphasis added). Two readings of the passage are possible. Taken literally, it identifies Peckham as a supporter of the idea of freedom from contract as the true foundation of antitrust enforcement. Each business had a right to conduct its affairs “in the ordinary way”; this right had been infringed by the combination; here lay the reason for declaring the combination unlawful. Freedom from contract is directly related to the freedom to trade understanding of competition. The idea is that market power always constrains, either directly or indirectly, the trading opportunities of economic agents by reducing their liberty to conduct their affairs - or, as a neoclassical author would say, by reducing “the volume or extent of [their] dealing in the commodity”. Market power, in other words, always materializes as a formal or informal, direct or indirect, contractual obstacle to trade. Only under “free and unrestricted competition” would economic agents be capable to exploit all their trading opportunities, but this requires that all contractual restraints be made unlawful — the hallmark of antitrust literalism. In this reading, Peckham’s competition principle is identical with, say, Harlan’s in Northern Securities or Sherman’s original bill. Moreover, Peckham could also be considered as a true forerunner of the modern, welfarebased, “high price, low quantity” interpretation of antitrust violations. Freedom from contract fully accords with a neoclassical view of competition as a well-specified market structure made of atomistic firms.
38
Allgeyer v. Louisiana, 165 U.S. 578 (1897). Addyston Pipe & Steel Co. v. United States, 175 US 211 (1899). 40 United States v. Addyston Pipe & Steel Co. et al. (Court of Appeals, Sixth Circuit, 1898). On Taft’s famous opinion see, for all, Letwin 1965, 172-8; Bork 1965, 796-801. For a less enthusiastic assessment, see Hovenkamp 1989, 1041-4. 41 For a full analysis of Peckham’s Addyston Pipe opinion, see again Giocoli 2015, Ch.10. 39
25
That the author of TMFA, and a champion of the literalist faction in the Court, could embrace this reading of the Sherman Act is surely a possibility. However, it is difficult to reconcile this conclusion with Peckham’s position in other cases.42 Not only because, as we know (see §4), he would join Holmes in Northern Securities to refuse Harlan’s reading of the competition principle. But, above all, in view of what Peckham himself had declared just one year before Addyston Pipe in another, much less famous antitrust case, Hopkins v United States (171 U.S. 578, 1898). The contract challenged in Hopkins was accused of having violated the Sherman Act precisely because its bylaws deprived the underwriters of the liberty to conduct their business as they saw fit.43 This was a clear instance of a freedom from contract challenge, but Peckham, writing for the Court, expressly rejected it. A citizen, he maintained, had the right to freely perform his business activities as well as the right to give up such freedom. “Cannot the citizen, for what he thinks good reason, contract to curtail that right?”, he asked. “What a State may do is one thing, and what parties may contract voluntarily to do among themselves is quite another thing” (Hopkins, at 603). Peckham was crystal clear that antitrust law did not prohibit restraints on the competitors’ freedom, but only restraints on trade. It was the effect of a contract upon interstate commerce that controlled the application of the Sherman Act, determining whether the constitutional protection of contractual liberty ceased to operate, not the circumstance that the contract might entail a restraint of its subscribers’ own freedom. As law historian Alan Meese put it, “the mere fact that a contract restrained the ‘liberty’ of private parties did not thereby render it a direct restraint beyond constitutional protection” (Meese 1999, 58). How to explain, then, that passage in Addyston Pipe? How to reconcile it with Peckham’s other jurisprudence and his competition principle? The key is to recognize that the effect a restraint may have upon competition and prices is not necessarily allocative, as in the neoclassical approach, but may well be distributive, as in classical political economy. The latter is the effect Peckham, like most other jurists of the time — and like many of the Congressmen who voted the Sherman Act44 — had in mind when thinking of the adverse impact of cartelization. In classical political economy, the true yardstick for assessing market outcomes, be they prices, quantities or profits, was their conformity to the natural (i.e., long-run, equilibrium) values, rather than their being conducive to allocative efficiency (which was merely a consequence, to be assessed in dynamic terms). Natural values were first and foremost just values, in the sense of satisfying the conditions of justice and equality of Adam Smith’s system of natural liberty. The central role of competition in that system then stemmed from its unique ability to spontaneously engender those natural values in the marketplace. To do
42
Again, I will neglect here the demonstration of how even Peckham’s antitrust literalism is more legend than (jurisprudential) fact. The rules of the association at stake in Hopkins forbade members from buying cattle from non-member merchants, fixed the commissions members should charge to owners and prohibited the sending of information about market conditions. See Meese 1999, 56-9. 44 Recall Lande’s analysis: see above, §3. 43
26
so, however, competition had, generally speaking, to be left completely free. In this sense, free competition had to be “the norm” in the classical system. As we know (see above, §1), this “norm” was interpreted by classical writers especially in the vertical sense of a free interaction between buyers and sellers — in short, as freedom of contract. Building on the pioneering analysis by Alan Meese (Meese 1999), I thus claim that the “ordinary way of doing business” evoked by Peckham in Addyston Pipe was any conduct conforming to classical competition and capable of generating natural values. I also claim that the competition principle in TMFA should be read as Peckham’s endorsement of the classical notion of competition as freedom of contract. Given the close relationship between classical political economy and classical contract theory,45 a business behavior was ordinary when it conformed to the latter, that is to say, to the specific way of arranging contractual relationships that best met the requirements of the system of natural liberty. A specific way that, as we know, could be summarized as granting green light to the utmost freedom of contract. On the contrary, an unlawful restraint — a direct restraint, in Taft’s terminology — was any contract or other agreement inducing an agent to behave non-ordinarily, i.e., to deviate from classical competition and produce nonnatural prices. In short, direct restraints were all those contracts and agreements that fell outside classical contract theory and, therefore, violated the competitive norm of the Smithian system. A consequence of this interpretation is that, as noted by Meese,46 it turns on its head the standard relationship between freedom of contract — Peckham’s signature doctrine in Lochner — and antitrust law. Contrary to what is usually claimed in the literature, it was contractual liberty that set limits to the Sherman Act, protecting “ordinary” contracts and combinations, but not direct restraints. In other words, the notion of direct restraint was not a limitation to the scope of classical contractual freedom, but rather it stemmed by difference from it. The right way to read Peckham’s passage in Addyston Pipe opinion is then to acknowledge that, for him, freedom of contract controlled the scope of the Sherman Act (not the other way round, as in the freedom from contract view). It did so by guaranteeing constitutional protection against antitrust challenge to all classical, i.e. “ordinary”, contracts. In particular, a restraint was direct, and so triggered intervention, if it affected interstate trade “in a way that produced the sort of harm that justified regulatory intervention under the classical economic paradigm that informed liberty of contract jurisprudence” (Meese 2012, 796). All other agreements remained beyond the reach of the Sherman Act and under the freedom-of-contract shield. These agreements included standard contracts, such as the formation of partnerships, covenants not to compete, and even mergers. Any of these agreements might well lead to higher prices, because of their restraining effects upon competition. Still, their impact on prices was perfectly natural, because each of them fell within classical contract theory. Hence, a contract or other business practice could well be “ordinary” despite leading to higher prices. It was not the
45 46
See e.g. Mill’s quote above, §1. See Meese 1999, 66.
27
price level itself that, in Peckham’s view, should control the application of the Act – the harm the law should redress – but whether the price increase was in harmony with the classical system of natural liberty. Far from testifying to the abandonment of the classical approach in favor of a (largely ante litteram) neoclassical view, Addyston Pipe thus rested on the same principles of classical political economy that always inspired Peckham’s jurisprudence — like, for instance, in Budd, when he extolled the virtues of the “ordinary laws of trade” in preventing firms from pricing above the competitive (i.e., natural) level. Liberty of contract, epitomized in that dissent by perfect capital mobility, always retained a central position in his work as a judge and a Justice, regardless of the kind and the source of the regulation under scrutiny. Were it a New York state price regulation, as in Budd, a federal antitrust statute, as in Addyston Pipe, or a state law limiting working hours, as in Lochner, Peckham’s political economy did not change. As Meese (1999, 67) underlines, only one aspect of Peckham’s political economy did undergo some evolution: his awareness of the power of cartels to keep prices above their competitive level. Contrary to the classical monopoly theory he had followed in Budd, later in his jurisprudence he realized that an association of private producers could defeat competitive pressures and retain abnormal prices even without stateconferred privileges or unlawful coercion upon partners and outsiders. We can only surmise what may have led Peckham to change his mind about the effectiveness of competition, actual and potential, to destroy cartels. Perhaps it was simply his observation of contemporary events in the American economy, or his encounter with railroad cartels, or the influence of new economic theories that recognized that monopoly power could have sources other than government interference. What is certain is that the optimistic conclusion of the Budd dissent – avoid regulation and let free markets do their magic – was replaced by the dissolution order that struck the TMFA and Addyston Pipe cartels. Yet, it is remarkable that the principle driving Peckham’s injunction in the latter case was still perfectly aligned with the classical paradigm. Whatever the reason for its persistence, the iron-pipe cartel determined that competition could not deploy its beneficial effects and that prices would remain above their natural level. Therefore it had to be dissolved as a direct restraint in violation of the Sherman Act — more generally, as an impediment to the classical system of natural liberty. An alternative way to think of all this is in terms of the kinds of coercion a classical jurist like Peckham would admit as legitimate. The classical paradigm in contract law sanctioned those agreements that somehow coerced third parties, “provided that the coercion was expressed in the market and nowhere else” (Hovenkamp 1989, 1048). The idea was that in such cases competition would step in and protect coerced parties. This was for example Peckham’s own view of cartels in Budd. In Addyston Pipe Peckham no longer believed that competition would always work so smoothly. After all, he had already recognized that modern competition could take different forms, some of which were not necessarily beneficial.47 Freedom of contract
47
Think again of the circumstance where combinations, rather than “natural” technical progress, were responsible for crushing the “small dealers and worthy men”: see TMFA, at 322-3.
28
was still to him, as to all classical economists, the engine through which the classical competitive process deployed its marvels. However, he now accepted that certain “abnormal” manifestations of contractual liberty, like cartels, might actually play against competition, hampering it and leading to non-natural outcomes. A persistent market coercion of third parties epitomized that. What better illustration of a nonnatural outcome than witnessing a market participant suffer because of the unobstructed working of the free market, under the guise of the exercise of someone else’s contractual liberty? The classical paradigm could admit no such abnormal result. The law should step in and restore the natural harmony by eliminating that very exercise of contractual liberty (say, the cartel) from the classical catalog of lawful contracts. Even from this perspective, the classical paradigm thoroughly controlled Peckham’s antitrust law.
6. Conclusion. A matter of line-drawing
Recast as classical freedom of contract, Peckham’s competition principle would seem out of place in contemporary antitrust. In this final section, I argue that, on the contrary, it may still teach a useful lesson for today’s reformers. To grasp its modernity, let us summon in our discussion the notion of externality. Law historians know well that the theory of externality was the guiding light of the late 19th-century police power doctrine of protecting the “safety, health, morals and general welfare” of the community. So, for instance, the Lochner Court denied constitutional legitimacy to the New York state regulation of bakeries because no externality argument could justify it. For good or for worse, Peckham’s opinion in that case acknowledged that a law designed to redress the inequality of bargaining power between employers and employees — that is to say, to increase the effective wage of bakers by limiting their working hours — could not fall within the police power because there was no externality to cure. Low wages, or poor working conditions (whose negative health effects the Lochner Court expressly denied), were not an externality. The New York regulation, Peckham concluded, was simply an unconstitutional attempt to redistribute wealth, not a legitimate exercise of police power. If established law recognized that the only legitimate forms of government interference in the economy were controlled by the externality doctrine, how to justify that public powers could be deployed to protect competition in antitrust cases? High prices, like those generated by a trust or a cartel, could not be considered an externality. How could the same Justice who penned Lochner condemn the combinations in TMFA and Addyston Pie?48 Once again, the solution stems from recognizing that a different notion of externality exists – different, I mean, from the modern one.
48
“How then, one might ask, could an increase in prices be deemed an ‘externality’, any more than a low wage?” (Meese 1999, 85).
29
The meaning of externality in neoclassical economics is purely allocative: it is one of the main causes of market failure, viz., of inefficient resource allocation. Though externality harm is measured in welfare terms, the problem is not that somebody’s welfare has been hurt by someone else’s economic activity, but rather that in those cases the free market fails to maximize total welfare. This as a consequence of the failure of the pricing system to price the externality itself, i.e., of internalizing its effects. However, for classical economists externalities were first and foremost a matter of distribution. An externality was a non-market interference with someone else’s rights that generated a non-natural diminution of her welfare. The problem, in other words, was that somebody suffered a loss that had no market explanation – a non-market and, therefore, non-natural harm, the cause of which fell outside the system of natural liberty. This harm called for redress, not because it was necessary to restore allocative efficiency, but because someone’s property rights had been unnaturally — viz., unjustly — infringed. Solving the externality problem was, in short, a matter of justice, not efficiency. John Stuart Mill had explained that freedom of individual action found its limit in the absence of spillovers (a.k.a. externalities) upon others: “The liberty of the individual must be thus far limited; he must not make himself a nuisance to other people” (Mill 1869 [1859], III.1). The presence of an externality meant that a conflict arose between two agents: someone’s self-interested behavior caused a non-market harm to someone else.49 While Mill denied that the mere existence of this conflict was itself sufficient reason to justify government intervention, he recognized that even some contracts, despite their being, by definition, mutually beneficial for the parties, should not enjoy protection by the legal system if they contrasted with “the general policy of the state” (Mill 1909 [1848], V.1.6). Extensive spillovers upon third parties determined one such case of contracts that government might not consider “fit to be enforced”. Mill’s notion of externality as non-market harm is the final ingredient to fully appreciate, and properly qualify, Peckham’s competition principle in modern terms. As we explained in §5, in the antitrust realm direct restraints lead to non-competitive prices. These prices are harmful because they do not conform to the kind of outcome classical markets should generate, i.e., because they determine a non-natural distribution of wealth. While it is true that “market forces quite ‘naturally’ produce both collusion and efforts to exclude competitors” (Crane 2005, 512), a distinction should be made between natural market forces and natural outcomes. Both the economic force (self-interest) and the legal principle (contractual liberty) are indeed “natural”. But their outcome is not necessarily so. Only one natural distribution (as well as allocation) of wealth exists. It is the ideal, just distribution determined by the free play of competitive forces within the classical system of natural liberty. This system admits of no monopoly or other kinds of non-market coercion; therefore, no non-natural harm may exist, and this because the only admissible interferences with someone’s
49
Mill expressly ruled out the possibility of redress for those spillovers naturally occurring in the context of the competitive market system: “society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering” (Mill 1869 [1859], V.3). On Mill’s theory of externalities, see Medema 2009, Ch.2.
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property rights are those determined by the competitive process — what Holmes described as the legal privilege to inflict a “competitive injury”.50 Harmful is indeed synonymous with non-natural, i.e., with “determined by undue interference with someone’s rights”, where “undue” is itself tantamount to “noncompetitive”. In the system of natural liberty, you are only allowed to interfere with someone else’s property rights when your behavior has natural effects, i.e., effects transmitted through competitive markets and conforming to classical outcomes. In this case no actual harm exists, if not the natural (i.e., not really harmful, but socially beneficial) consequences of free competition. Like for Millian spillovers, antitrust intervention was therefore justified in the face of the non-natural effects of high prices because someone, somewhere had suffered from an undue (non-natural, noncompetitive) infringement of her rights. The legal grounds for proscribing price-fixing were thus the same as those of the laws condemning pollution or theft.51 Ditto for their distributive, justice-oriented goals. In other words, Peckham outlawed the cartels in TMFA and Addyston Pipe for the very same reason he denied legitimacy to the police power argument in Lochner. By definition, the wage bargained by formally equal contracting parties could never cause harm in the classical sense. The bargaining itself between employers and employees was the product of the definition and protection of property rights established by the common law and the American Constitution. Its result was the natural outcome of the combined action of these legal entitlements and free competition, classically understood. As the Lochner Court remarked, it gave rise to no externality at all, hence it was outside the scope of the police power. At the end of the day, the competition principle drove the outcome in both Lochner and the antitrust cases. The relevance of Peckham’s approach for contemporary antitrust then stems from recognizing how 19thcentury American law had translated the abstract principles of the system of natural liberty into a list of lawful business conduct. Most of the weight of discerning between natural and non-natural interferences with someone else’s rights thus fell on classical contract theory. This is why a “contract or practice could be ‘natural’ or ‘ordinary’ and still lead to prices above the status quo ante” (Meese 1999, 90). In the classical era of so-called categorical law,52 the controlling condition was that the agreement or practice under scrutiny belonged to the catalog of “accepted” contracts – that is to say, of those restraints that, by virtue itself of their belonging to the catalog, led to presumptively natural results, whatever these results might be, allocatively speaking. Admission to the catalog was policed by a contract’s distributive effects, i.e., if they were natural or non-natural with respect to the “just” distribution envisaged by the classical system. In other words, the yardstick for lawfulness was neither a contract’s impact on the price level, nor the net creation of
50
“But the law does not even seek to indemnify a man from all harms. […] There are certain things which the law allows a man to do, notwithstanding the fact that he foresees that harm to another will follow from them. […] He may establish himself in business where he foresees that of his competition will be to diminish the custom of another shopkeeper, perhaps to ruin him” (Holmes 1881, 144-5). 51 See Meese 1999, 88. 52 On categorical thinking in post-Civil War American law, see Horwitz 1992, Ch.1.
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wealth, but the circumstance of its being listed or not among the contracts deemed “conducive to natural results” in a distributive sense. Here lay the reason for condemning cartels. “[C]artel generated prices were deemed ‘harms’ as a distributional matter”, Meese (1999, 87-8) explains, “because they departed from the prices that would have been produced by the ‘natural’ workings of the market”. On the contrary, contracts that were merely supportive of the achievement of another, natural outcome (like e.g. Taft’s ancillary restraints) always satisfied the naturalness test. Yet, it is crucial to recognize that this approach, while categorical, was also very flexible and open. The list of lawful contracts was neither definite nor fixed. Legal conflicts often arose over contracts on the catalog’s boundary or because of mutable business practices. Indeed, the common law of contracts continually filled in, or revised, the catalog with an eye to evolving economic conditions and the welfare-improving potential of the various contracts. So, yes, allocative issues did play a role in determining whether, say, a price-increasing contract could survive the competitive test. But it was not the static, neoclassical efficiency à la Bork that the ideal master-of-the-catalog had in mind. It was a growth-inducing, dynamic efficiency à la Adam Smith.53 Focusing on the natural character of competitive market outcomes is the gist of the so-called baseline view of post-Lochner, so-called laissez faire constitutionalism.54 Viewing competition as a baseline, or norm, capable of ensuring dynamic efficiency and distributional justice, is indeed the key message we may draw from Peckham’s competition principle. A message grounded on the rich and flexible discourse of classical political economy. The latter was, as is well known, not just an “economics”, but a “political economy” in the proper sense of the expression. That is to say, a specific worldview about the relationships between individuals and society, the market and the state, which drew upon fields as diverse as (what we modernly call) economics, political science, philosophy and sociology. As Peckham recognized, the competition principle was a pillar of that worldview. Properly adapted to the economic reality of the 21st century, I suggest that the idea of a competitive norm — where competition is defined as contractual freedom, rather than as a welfare-maximizing market structure, and where a central role is assigned to the distinction between competitive, i.e., lawful, and non-competitive, i.e., unlawful, harm caused by the different, always evolving, business behaviors — could still revive contemporary antitrust. In this respect, one must recognize that selecting the natural outcome of classical competitive markets as the baseline was neither arbitrary nor casual. Classical political economy contained strong distributive and
53
Another way to say it is to follow Grillo (2018) and note that freedom — classically understood — was a precondition to welfare. According to Grillo, the modern, Chicago-based approach to antitrust focuses solely on welfare because it takes freedom, including contractual freedom, for granted. As we have showed, Peckham, and the classical economists before him, prioritized freedom, by expressly checking the naturalness of any contract or behavior. Given the outcome of that check, the consequences of a certain contract or behavior, regardless of their metric and sign, could then be simply presumed. 54 “Market ordering under the common law [of the Lochner era] was understood to be a part of nature rather than a legal construct, and it formed the baseline from which to measure the constitutionally critical lines that distinguished [government] action from inaction and neutrality from impermissible partisanship” (Sunstein 1987, 874). For the idea that the Lochner Court found its baseline in the fundamental constitutional – as well as classical – principle of economic liberty, see Bernstein 2003.
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allocative arguments for viewing this baseline as highly recommendable vis-à-vis American constitutional law. By preventing non-natural distributions of wealth, the competitive baseline guaranteed at the same time the intangibility of the individual’s sphere of economic rights and the provision of correct incentives to address the exercise of these very rights towards the maximization of social wealth. In the classical paradigm, the natural, viz., competitive, distribution of wealth was also the best distribution – where “best” meant the distribution guaranteeing the maximization of “the Wealth of the Nation”. The natural outcome of the classical model was not only just, but also efficient, albeit in a markedly long-run, dynamic sense.55 Reconstructing antitrust along classical lines would therefore preserve the efficiency goal — indeed, it would enhance it by replacing the current, short-term static view of welfare with a long-term, dynamic one. On the other hand, the notion of harm controlling Peckham’s antitrust jurisprudence was not welfare-based (like e.g. neoclassical externalities). It was a distributive, rather than allocative notion. Its grounds were moral, more than economic. Harm meant, as in Adam Smith, the unjust violation of property rights, the almost sacred status of which admitted of only one kind of lawful breach, namely, those caused by competitive forces — a.k.a. Holmes’s competitive injury. This narrow requirement provides a final lesson for contemporary debates. While today we may disagree with the way Peckham, and the classical economists before him, draw the line between competitive and noncompetitive injury, it is the line-drawing exercise itself — and the sophisticated worldview of classical political economy that guided it — which perhaps need be rediscovered by those willing to rebuild antitrust upon grounds different than mere economic welfare. The competition principle, classically understood, suggests that one such ground does exist. Classical authors called it freedom.
References
American Antitrust Institute (2016). A National Competition Policy: Unpacking the Problem of Declining Competition and Setting Priorities Moving Forwards (Sept 28, 2016). Bernstein, D. E. (2003). Lochner's Legacy's Legacy. Texas Law Review, 82, 1-64. Bork, R. H. (1965). The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, Part I. Yale Law Journal, 74(5), 775-847. Bork, R. H. (1966). The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, Part II. Yale Law Journal, 75(3), 373-475. Bork, R. H. (1978). The Antitrust Paradox: A Policy at War with itself. New York: Basic Books.
55
It is only in this truly classical sense that Bork and the other supporters of the allocative interpretation of early (including Peckham’s) antitrust jurisprudence got it (trivially) right. For both classical and neoclassical economists, competitive markets do guarantee the achievement of the best allocation and distribution of resources.
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