WEALTH AGAINST COMMONWEALTH
Part One showed how antitrust legislation evolved over time as the public became more aware of the types of anticompetitive abuses firms could engage in. Part Two showed what is meant by “anticompetitive” from an economic perspective, why it is problematic, and what kinds of behaviors it involves. This section addresses how antitrust regulation evolved within both the Executive and the Judicial branches of the federal government, becoming a very effective force in promoting a market system that operated with a high degree of freedom, yet was able to control many of the negative aspects of capitalism. In combination with other New Deal policies that dominated economic policies for nearly four decades, antitrust policy contributed to the greatest period of prosperity for the largest group of Americans in its history. Part Four will show how these New Deal policies, and the effectiveness of the Executive branch, would be undermined by Neoliberalism. Part Five will describe the impact of the Neoliberal overthrow, and Part Six will offer some ideas on moving forward.
The original antitrust law, the Sherman Act, had been passed only after compromises that rendered it vague and difficult to implement. This led to two consequences. The first is that in the early years of the law, it wasn’t used much by the Justice Department to address problems caused by monopolistic firms. The second outcome is that case (judge made) law became the default tool shaping antitrust policy. However, case law proved to be insufficient to address the complexities of antitrust regulation, which required a more proactive approach. Many of the tools needed to regulate the behavior of firms were not available in the first decades of antitrust policy. It would take the development of an aspect of law that the U.S. had not previously employed in its history to enable antitrust regulation. This is the subject we now address.
A More Perfect Union
A quick overview of some basic civics will help as this discussion proceeds. We tend to think of law as a singular phenomenon, but there are actually multiple types of law governing the country. Of course, we have different levels of government—federal, state and local, each covering its own jurisdiction and implementing its own law. But we also have different types of law at each level.
At the federal level, the Constitution lays out the foundation of the government, and from it constitutional law is derived. The law we are most likely to be familiar with is statutory law, which is created by the House of Representatives and the Senate, and typically signed by the President (with an exception in the event of a veto). Case law (also called common law) is law made by the courts in hearing and deciding on cases which come before the court. Case law is steeped in precedent, but is also based in statutory law, unless a statute is found to violate constitutional law. If so, the statute is invalidated as “unconstitutional”.
Probably the least known type of law is administrative law. Administrative law is enabled by statutory law, but developed by the Executive branch of the government to implement statutory law. When laws become effective, they must be properly carried out and enforced. In the legislation Congress may assign the responsibility to an existing agency, or may create a new agency. To implement and enforce the new law, the assigned Executive agency develops a procedure which is formalized into a regulation, also referred to as a rule. Administrative law is the collective total of all regulations published by the Executive branch.
Sources and types of law at the Federal level
There are two primary purposes of administrative law. The first is to codify regulations as they are being developed and being revised. In this sense, administrative law provides a structure for an organized system of legal classification. This structure is based on broad topics, called titles, which are similar to the code of statutory laws, and as such is published on a regular basis in the Code of Federal Regulations (CFR).
Administrative law has a set format and a specific process by which agencies create regulations that are systematically reviewed. In the process of regulatory development (i.e. rulemaking) U.S. agencies provide an opportunity for public input before they are finalized and included in the full code. There is also a process for updating or revising existing regulations. Administrative law has been created with the intent (though not always realized) to provide transparency and consistency to the public.
The second purpose is to protect the public from abuses that could be inflicted by capricious and reckless regulators. Administrative law provides a check on the bureaucracy so that the public remains safe, and rights are not violated as complex and opaque institutions make decisions that could lead to very harmful outcomes for individuals, organizations and communities.
Administrative law was not specifically addressed in the Constitution, although Article 1, Section 8 allows Congress to authorize it. In fact administrative law was not even part of our legal system at the Federal level in any formalized way until the New Deal. The limited reach of the Federal government through most of the nineteenth century did not require complex regulations, so administrative law was not a necessity. However, as the New Deal advanced, Federal government activities increased. Congress realized the potential for injury to the public and decided that limitations must be put on the Executive branch.
In 1935, the Federal Register Act was passed, which required Executive orders and proclamations, as well as administrative actions and notifications required by Congress to be documented and published on a daily (weekdays only) basis. The Federal Register is the official daily record of the Executive branch. It is maintained by the Archivist of the U.S. and is available to the public.
While the Federal Register Act provided an organized structure and transparency regarding administrative actions, it did not serve as a check on administrative power. Congress continued to debate the need for an administrative law system, and in 1946, the Administrative Procedure Act (APA) was passed. The APA set up requirements for the decision-making process used by agencies in the Executive branch when developing regulations. It also allows and governs internal and external judicial reviews of agency decisions.
The APA recognized that government agencies have the power to use both formal (on the record and therefore subject to formal judicial hearings if challenged) and informal (not on the record) processes in implementing statutes. They also have the authority, given to them by Congress, to regulate future actions by the public, in order to implement the laws that are the agency’s responsibility. The process of developing such regulations by agencies is called rulemaking. Rulemaking can be done formally, or informally. Any actions other than rulemaking (such as licensing, certification, dispute resolution or benefits determinations) taken by administrative agencies in implementing statutes are called orders, or adjudication. Adjudication can also be formal or informal.
So the APA specifies what processes agencies in the Executive branch must engage in when using both formal and informal approaches to issue either regulations or orders. The most detailed process covered by the APA is formal rulemaking, a widely used approach across the Executive branch, but especially in agencies responsible for health, safety, and environmental issues.
The APA also recognized that administrative responses to legislation would involve specialized knowledge in many cases, and it allowed for the use of technical expertise in both the development of administrative procedures as well as judicial reviews of these procedures. This allowance has proven to be important in antitrust policy development in both positive and negative ways, as we will see as the series proceeds.
Antitrust Phase One—The Emergence
In the period between the passage of the Sherman Act in 1890, and the U.S. entry into WWI in 1917, scandals related to the abusive and corrupt behavior of corporate behemoths emerged frequently. In response, Congress passed the string of laws discussed in Part One of this series. However, with no Administrative state to speak of, implementation of these laws continued to defer to the Judicial branch through decisions made in cases brought before the courts.
One such decision, the case Addyston Pipe and Steel Co. v. United States, dealt with the vagaries of the Sherman Act’s purpose of addressing restraint of trade. The case involved an incident now known as bid-rigging, in which a group of pipemaking companies made an agreement on which firm would submit the lowest bid in municipal projects. The defendants argued that this behavior was reasonable and did not constitute a restraint of trade. The government asserted this was in fact a clear violation of the law. In short, this case tested the definition of the term restraint of trade by claiming that some business practices were acceptable even if they did have some restraining effect, and not outright per se (always illegal). The Sixth Circuit Court of Appeals, in an opinion written by future President William H. Taft, acknowledged that some business practices could be seen as reasonable, and not per se violations. In Taft’s opinion this case did not involve a reasonable business practice and was a restraint of trade.
The case was brought before the Supreme Court in Addyston Pipe and Steel Co. v. United States (175 U.S. 211, 1899), which agreed with the lower court’s ruling. This set an important precedent for antitrust, creating the rule of reason doctrine, making antitrust regulation more complex but also more vulnerable to being undermined.
Through the remainder of the pre war era, Congress added to the slate of antitrust laws with the Clayton Act, the Federal Trade Commission Act (FTCA), and others. However, while the FTCA created the Federal Trade Commission (FTC), an administrative agency, there still existed no formal administrative structure or process for developing regulations. The Progressive era ended with the U.S. entrance into WWI, and the subsequent years proved to be antithetical to regulation with the Harding, Coolidge, and Hoover administrations.
Antitrust Phase Two--Revenge of the Muckrakers
The economic and political crises of the Great Depression, and the election of Franklin Delano Roosevelt (FDR), meant a new way of running the government had to be found. Stymied at times by both Congress and the Supreme Court, FDR decided to make the most of his authority, expanding the Executive branch as never seen before in U.S. history. His popularity gave him the force he needed, his political savviness helped him to build coalitions he could work with in Congress, and his advisors, like Frances Perkins, advocated for progressive policies. The result was the passage of legislation creating new agencies in the Executive branch to implement novel programs, such as the Social Security Administration.
Not everything worked, and one widely acknowledged failure was the National Recovery Administration, created by the National Industrial Recovery Act (NIRA), passed in 1933. NIRA was a bold, experimental act which suspended antitrust enforcement to allow competing companies to form alliances, and effectively would set prices and wages. It was declared unconstitutional by the Supreme Court in 1935. As a result, for the remainder of the 1930’s, FDR’s administration took a more indirect approach to antitrust, encouraging regulation at the state level, and focusing at the national level more on supporting labor as a countervailing force against monopoly power. This was a significant change from earlier administrations, which tended to approach labor unions themselves as anticompetitive entities to be prosecuted. As a result, the courts continued to play a major role of shaping federal antitrust policy.
A young southern Democratic House member, Wright Patman, took on the antitrust issue early in his career, and retained it through his nearly 50 years in Congress. Because he was from a rural district in northeastern Texas at a time when many farms were lost to foreclosure, he was also a proponent of strong banking regulation. He sponsored the Robinson-Patman Act in 1935, which prevented wholesalers from price discrimination againt small retailersby charging them higher prices than they charged chains. In the early 1970’s Patman demanded of the then-chair of the Federal Reserve, Arthur Burns “Can you give me any reason why you should not be in the penitentiary?”. He remained a protector of antitrust policy and bank regulation through his legislative tenure which ended in 1976. Patman was not the only member of Congress to maintain a commitment to antitrust policy, but he was arguably the most committed.
The combination of Progressive era appointments, and the trauma of the Great Depression also led the Supreme Court to become much more sympathetic to antitrust than they had ever been before. Judge Louis Brandies, a Wilson appointee, retired from the court in 1939, but his distrust of big business left a legacy that his successor, William O. Douglas, carried on.
Wright Patman
When WWII broke out, the Federal government essentially took control of the U.S. economy, administering price controls and requiring manufacturers to produce for the war effort. One company that did not cooperate with the war effort was the Aluminum Company of America, or more commonly, Alcoa.
Alcoa was a thorn in the side of policy makers and regulators William O. Doug interested in controlng monopolies, and in 1938 the Justice Department charged Alcoa with being an illegal monopoly, though the case would not be decided until 1945. Alcoa had very effectively set itself up to maintain its monopoly power by taking control of bauxite supplies around the world. Bauxite is a mineral that is required for the production of aluminum, and with control of this resource, along with high capital costs and aggressive moves against potential competitors, Alcoa managed to keep its monopoly going for many years. As seen in Part Two of this series, monopolies can use their power to charge high prices, and can limit production to maintain high prices, which is exactly what Alcoa did, making production for the U.S. war effort difficult and expensive.
Working with businesses in related industries, the U.S. government made low interest loans available to establish competitors, Reynolds and Kaiser aluminum companies, giving Alcoa competition which continued after the war ended. This competition ultimately saved Alcoa from being broken up into smaller companies in the conclusion of United States v. Aluminum Company of America. It was a landmark case which concluded that the existence of a monopoly per se was not illegal. The court determined that being a monopoly alone was not illegal, but instead how the company became a monopoly was the issue, i.e. did the monopoly come about through abusive anticompetitive practices like those discussed in Part Two.
Phase Three—Invasion of the Economists
During the 1930’s the economics profession was challenged by the failure to predict and solve the Great Depression. The iconoclastic British economist, John Maynard Keynes, broke new ground in proposing that the government not only could but should intervene, to increase demand and regain economic stability. Keynes’ work inspired a generation of new economists, among them was another British economist, Joan Robinson, who later laid much of the foundation for studying different types of market structures. Simultaneous work on imperfect competition was also being done on the other side of the Atlantic by Edward Chamberlin. Joe Bain, who studied under another iconoclastic economist, Joseph Schumpeter, developed the work of Robinson and Chamberlin, further. His work, done at the University of Berkeley in California in the 1950s, formed the basis of the conduct, structure and performance approach to industry analysis, focusing on the overall industry and how firms in the industry are organized, behave and interact. This research influenced the early work of other economists in antitrust, and formed the basis of the field of Industrial Organization, a subset of economics.
Joan Robinson Joe Bain
As the economics profession was fleshing out the study of industrial economics in the 1950s, antitrust policy continued to be determined mainly by the Judicial branch of the Federal government. The Executive branch’s involvement was primarily investigating potential anticompetitive practices. But as the administrative state continued to grow, its influence on antitrust policy began to emerge. In 1966, President Lyndon Baines Johnson appointed a Harvard economist, Donald F. Turner, who also had a law degree, and who would also lead a greater role for the administrative state. This would be done by bringing economic analysis into the development of antitrust policy in the form of guidelines for assessment of mergers. Over the years the guidelines would change, varying with shifts in economic thinking.
Part Four will continue with the discussion of economics and antitrust. In particular, it will cover changes in economics away from a more progressive approach and back to a focus on markets free of regulation and other government interventions. Part Five will demonstrate that this was a choice with many negative consequences, and Part Six will suggest ideas for moving forward.
Sources:
“Modern Industrial Organization, 4th Edition,” by Dennis Carlton and Jeffrey Perloff, Pearson Education, 2004
“Goliath,” by Matt Stoller, Simon & Schuster, 2019
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