A wet hot antitrust summer is in the news, mainly because of the Biden administration appointees continuing to take an aggressive approach to enforcement. Why is this important, and how has antitrust thinking evolved over time? In this conversation, Bethany and Luigi draw from his long-standing research and from the Stigler Center's most recent antitrust conference exploring new paradigms of traditional economic ideas. Together, they trace the evolution of antitrust from its fraught foundations to today's version, shaped by decades of political, economic, and legal minds. In the process, they spell out what a changing antitrust landscape could mean for us all.
A wet hot antitrust summer is in the news, mainly because of the Biden administration appointees continuing to take an aggressive approach to enforcement. Why is this important, and how has antitrust thinking evolved over time? In this conversation, Bethany and Luigi draw from his long-standing research and from the Stigler Center's most recent antitrust conference exploring new paradigms of traditional economic ideas. Together, they trace the evolution of antitrust from its fraught foundations to today's version, shaped by decades of political, economic, and legal minds. In the process, they spell out what a changing antitrust landscape could mean for us all.
Show Notes:
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: Particularly with the Biden administration’s recent moves on the antitrust front, antitrust has become an even more important question. How do we use antitrust laws to make capitalism work? And are there changes that are needed in those laws?
Recently, we had a conference at the Stigler Center to try to find out what the people who are really thinking about antitrust are thinking is next, and in order to appreciate how antitrust will evolve, we had to dig into how antitrust has evolved in the past.
In today’s episode, we’re going to try to distill the history, and there’s really nobody better to talk about this than Luigi because he’s spent a lot of time thinking and writing about antitrust.
Luigi, maybe a good place to start would be, when did you start thinking about antitrust, and how have your views evolved?
Luigi: I think that I started to be interested as I wrote my book A Capitalism for the People more than 10 years ago. I always thought that the United States was at the forefront of enforcing antitrust, et cetera. I started to discover that was not the case anymore.
It’s true that antitrust was born in this country, but it’s also true that starting in the mid-1970s or early 1980s, antitrust started going down. And I started to be concerned, both in general and then, of course, in particular, for what was happening with the big tech firms.
Bethany: When you say antitrust was born in this country, what do you mean? What’s the seminal moment? The founding moment?
Luigi: The founding moment was in 1890, when John Sherman succeeded in passing what goes by the name of the Sherman Act. Apparently, this was a quid pro quo between a group of people who wanted to have tariffs to protect American industry and a group of people who were concerned about the effect of tariffs, particularly the effect of tariffs on consumers.
And so, at the same time when tariffs were introduced, Congress introduced this law that, in principle, prohibited every form of collusion, any restraint of trade, and also any form of monopolization. This is where the problem started. The term was fairly vague.
Bethany: Huh. If I’m hearing you correctly, even the founding moment of antitrust law was fraught. It wasn’t quite what it appeared to be on the surface. And then, what happened after that? Even when this law was passed, there’s a difference between a law existing and a law being enforced. Was the law enforced in the way it was intended?
Luigi: Actually, no. As soon as the law was on the books, people started to interpret it in a funny way, and in particular, industrialists realized that there was a major loophole. The law talked about any restraint of trade or counter-restraint of trade, but not mergers. You could go around antitrust law by merging, and so, you could monopolize an industry by buying everybody else in the industry.
Now, to be fair, at the time when the antitrust law was passed, it was not easy for a company to buy another company. In fact, for many years, it was impossible for a company to buy another company by giving shares in exchange.
It was actually the state of New Jersey that introduced that possibility in order to please none other than our friend John Rockefeller—full disclosure, the original donor of the University of Chicago—who actually created Standard Trust by, basically, merging all the companies.
Bethany: New York M&A investment bankers actually owe their existence to New Jersey?
Luigi: Absolutely. When the Sherman Act was passed, it was not that common to merge. Immediately after the antitrust law was passed, there was literally a merger wave in America. Nothing could be done until the Clayton Act was passed in 1914, when they basically added to the Sherman Act a statement saying that if you merge, that’s a problem as well.
Bethany: Does the Clayton Act mark a new era in antitrust, or was it more of an add-on to the Sherman Act?
Luigi: No, it was more than that because at the same time when the Clayton Act was passed, the Federal Trade Commission was created, and so, now you have an agency that is in charge of studying what’s happening and creating the knowledge to actually intervene.
For decades, the Federal Trade Commission actually did many important industry studies focusing on different sectors of the economy. Industry really hated it and did everything possible to kill it. By and large, the FTC stopped doing that for a while. Now, recently they have launched such a study on social media, but for decades, basically, there was none.
Bethany: Would you say that at that time, was there an intellectual conception of what antitrust was supposed to be? Were economists thinking about it? Were academics thinking about it? Was there a sense that competition was this defining and important feature of a business landscape, or was antitrust mainly showing up in the form of practical laws?
Luigi: I think that an antimonopoly tradition is very rooted in this country. In fact, some people claim that the famous Tea Party was not a revolt against taxes but a revolt against the monopoly power, The East India Company, that was actually damping tea below market price to undermine the local importers and taking advantage of the market power they had in England.
Bethany: Oh, that’s totally fascinating.
Luigi: And it is interesting that the same John Sherman of the Sherman Act has a passage that links the two things and says—I’m going by memory, so don’t quote me exactly—if we don’t tolerate a king in the political realm, we don’t want to tolerate any king or kingdom in the realm of necessities of life: imports, production and distribution of what is essential for our livelihood. I think that there is a very clear connection: concentrated political power is bad, but concentrated economic power is equally bad.
Bethany: I’ve often heard of Brandeis and Brandeis’s arguments against bigness. Even today, you hear this term tossed around antitrust conversations about being a neo-Brandeisian, and so I’d like to pause on, who is Brandeis, and what is his contribution to antitrust, and is he part of this first wave, or does he come later?
Luigi: Louis Brandeis is a very key figure in the intellectual history not only of antitrust but also of securities law. He was initially a corporate lawyer, but then he decided that he wanted to be a people’s lawyer, and he really advocated rebalancing the power between the strong interests and the diffused interests.
He waged a singlehanded campaign against constitutional power in finance, particularly J.P. Morgan—John Pierpont Morgan, so the original figure, not only the company—because he had enormous power from investment banking that was going to all industries and to all the economy, and so he fought very aggressively to reduce that power through more transparency. He eventually was appointed to the Supreme Court and then actually ended up being the first Jewish Supreme Court Justice.
Bethany: There’s a great quote from Brandeis, “We can have democracy in this country, or we can have great wealth concentrated in the hands of the few, but we can’t have both.” That sounds like it was aimed directly at J.P. Morgan.
Luigi: Yes, absolutely, and you know, you can aim that now at a lot of people because there are a lot more J.P. Morgans. But what is interesting about Brandeis is, besides his passion for transparency—which was crucial and was one of the inspirations for the Securities Exchange Act and the Securities and Exchange Commission—I think he was very passionate about keeping the size of firms limited.
He has a, if you want, romantic view of a world in which everybody can be an independent producer, which is an idea that goes back to the Founding Fathers, that you can only be free if you don’t depend on anybody for your livelihood. In a world in which we are all employees of Amazon, can we have a democracy?
Bethany: Then does freedom ever really exist because isn’t independence always a bit of an illusion?
Brandeis was on the Supreme Court from 1916 to 1939, I think. At that time, were his arguments ascendant, or was there another point of view coexisting or fighting with Brandeis’ for supremacy? No pun intended.
Luigi: Actually, Brandeis, when he was on the Supreme Court, was not as aggressive on antitrust issues as you would have expected. As you know, at the beginning of the Great Depression, Roosevelt thought that maybe helping catalyze industry would support higher wages and would be a good thing, and so he actually passed the National Recovery Act, which basically created an antitrust exemption, trying to facilitate that process.
Ironically, it was the Supreme Court that blocked all that and said that it was unconstitutional. Once that happened, Roosevelt changed his course. In fact, one of the, I think, admirable aspects of Roosevelt is that he was very pragmatic and very determined to do something to save the country from the despair of the Great Depression. When he couldn’t pursue the National Recovery Act and this catalyzation—actually, in the meantime, we were already in the late ’30s—he realized that maybe what was keeping the economy underemployed was the concentration of economic power.
You might remember, in 1936, there was an expansion, but that expansion did not last very long because it immediately brought higher prices and so on and so forth. Part of the explanation at the time was that the industry was too catalyzed, and so when he increased demand and there was not a lot of supply coming in, the natural consequence was an increase in prices.
And so, Roosevelt appointed to the DOJ antitrust division this guy called Thurman Arnold, who, up to that point, had ridiculed antitrust. In fact, one of the funny things is that when he was in the hearings to be appointed assistant attorney general for antitrust, one of the senators reminded him of his book that was saying that, basically, antitrust was a sideshow, a little bit like anti-prostitution laws where people are good during the day, shouting against prostitution, and then they continue to sin at night. He saw antitrust like that. But when he was appointed, he actually started to be a very staunch advocate of antitrust enforcement, to the point that he started to put people in jail and go after everybody, including the American Medical Association.
Bethany: I was thinking when you were talking about Roosevelt that maybe he epitomizes that Ralph Waldo Emerson quote that I’ve always loved, which is, “A foolish consistency is the hobgoblin of little minds.”
But during this time, was there an academic sense of antitrust as well? Do thinkers like Keynes and Galbraith and others that we think of, Adam Smith, have views on antitrust and on bigness, or was this debate mainly the province of legal minds rather than of economists and academic minds?
Luigi: I think that antitrust was initially more legal than economic, but of course there was a debate in economics, and by the way, there were some people, and Galbraith is one of those, who actually believe in bigness for technological reasons, and they thought that bigness had to be controlled through other means, including nationalization or countervailing powers.
On the flip side of that, there were people that really believe in competition, even at the cost of breaking up big entities. Very few people know this, but George Stigler, the namesake of the center that sponsors this podcast, in the early years of his life was much more an advocate of antitrust enforcement, so much so that he had a piece in Fortune in 1952 titled, “The Trouble with Big Business,” where he states that the right thing to do—actually, the conservative thing to do—is to break up big business. And he said it’s conservative because the alternative is to regulate it or nationalize it, and those options are much worse. The much better thing to do is to break it up.
But to his credit, he said, very explicitly, the reason why he believes that is because he believes there are no big economies of scale in large businesses. And that’s the reason why, if you believe there are no large economies of scale, breaking up is costless from an economic point of view and good for competition.
Bethany: But that’s obviously not true, right? There are economies of scale in largeness. They may come at a cost to society, and those economies of scale may largely accrue to the benefits of the people running firms, but there for sure are economies of scale, aren’t there?
Luigi: There are clearly economies of scale at the very lower end. The question is, how many firms can you support with, let’s say, above the minimum-efficient plant? That’s number one.
Number two, in many situations, you can create economies of scale by contract, and you don’t need to merge—a point that, by the way, was emphasized at the conference by Nobel Prize winner Oliver Hart, who is an expert on mergers and reasons to merge.
He said, take, for example, the case of a network of towers to support a mobile-service company. Clearly, if you want to have a tower every, let’s say, 50 kilometers in order to support your customers, there seem to be gigantic economies of scale, and potentially there can be room for only one company. But the answer is no, because you can have a tower company that services all the customers, and they rent space or they rent services to all the other companies, and you can have competitive mobile-service companies that buy their tower services from one company. So, it’s not impossible to go around economies of scale in a certain way.
Bethany: As we head into the period after the New Deal and after World War II, is there an overall consensus on antitrust? Is the Brandeisian way of seeing things predominant, or is there another way of thinking about the world, and how are economists beginning to grapple with antitrust?
Luigi: There is one important point that a lot of people miss that characterizes the period of World War II and shortly after World War II, which is the identification of monopolies with autocracies. The Soviet Union was a big monopoly, right? You have one big firm, and they are the big monopolist. But also, there is no doubt that the industry structure of Germany and Japan and, to some extent, Italy, favored the concentration and the fascistization of the country.
Imagine you want to redirect a lot of money and resources to build more guns. In a market economy, you need to either vote to raise a lot of money to pay for more guns or distort the market prices, which is always difficult to do when it’s very visible.
On the other hand, if you have a couple of banks that control the allocation of most of the credit, it’s very easy to call three banks into your cabinet and say, “This is what we want. Make sure to do it, otherwise you’re going to get in trouble.” And they’re going to do it without the prime minister making any law or passing any decree or anything like that.
I think that, certainly, the experience of Germany, Japan, and Italy, and to some extent also the Soviet Union, scared the hell out of the American public about monopolies. You can see this in one of the later amendments to the antitrust law that takes the name of Celler-Kefauver. When that was debated in Congress in the ’40s, it was clear that the congressmen and the senators were making reference to this threat. They said, we need to fight monopolies because monopolies are the slippery slope to autocracy.
By the way, the Stigler Center had a panel a couple of years ago that discussed precisely the relationship between monopolies and the rise of Nazism. You can find it on YouTube on the Stigler page, and the title is, not surprisingly, “Monopolies and the Rise of Nazism.”
Bethany: Would you argue that there is this link between monopoly and authoritarianism?
Luigi: I think that’s definitely the case. It is a concentration of power. One of the important elements of any democracy, in my view, is the distribution of power, and these countervailing powers, of course, need to be in the constitutional framework and the political framework, but they also need to be in the economic framework. If you have all the economic power concentrated in the hands of one person, it’s impossible to have a democracy.
I think that the question about Amazon being the only employer in the country is provocative, but up to a point, I think it is a legitimate question. And in some company towns, we have seen what happens. If there is only one big employer in a town, that employer owns that town, for all practical purposes. Even if you go and vote, even if you go through the motions of free and fair elections, it is not really democracy.
Bethany: I tend to think, then, that the environment in ’50s and ’60s America would have been one with a lot of skepticism about monopoly and about big business. But when I think about American business then, I think about the Big Three car manufacturers. I think about the Nifty 50 in the 1960s. And so, I think about big business, really, really big business, somewhat unchecked, checked only by the sense that big business was also very paternalistic and believed in taking care of its employees. And I tend to think of that belief as having been the check on the power of big business rather than anything else. Why am I wrong? What was checking the power of big business in those years?
Luigi: I think you’re not wrong that in part as a result of World War II, some companies became incredibly large and incredibly powerful, but there was a countervailing fear in the population that led to strong support and bipartisan support. Whether you were Truman or Eisenhower, it didn’t make a difference. They were both in favor of a very strong enforcement of antitrust.
Bethany: So, what began to change? Bork? Is that the key word? Can we just reduce it to one word?
Luigi: No, I think that is more an epiphenomenon rather than the cause. I think that if you look from an economic point of view, two major things happened. One is that the economy globalized. American companies started to face foreign competition. Remember, antitrust was introduced at the time that the tariffs were introduced.
If you are a closed economy, you really need to be very careful that those producers don’t become overly powerful. If, all of a sudden, you have all the producers from Japan and Germany, et cetera, the power of the Big Three is much reduced.
Two, the economics profession did discover economies of scale and started to realize that a very strong antitrust enforcement could end up being a tax on success. You become big, most of the time, because you’re more efficient. When there is a lot of concentration, the companies are very profitable. It’s not because concentration necessarily leads to profitability, but because more profitable companies, which are generally more efficient companies, tend to become larger, and the market tends to become more concentrated. After all, take the example of Google and the search engine. Google became a monopoly in search because it was the best search.
And the third is, I think the fear of an autocracy or the United States drifting into either a fascist or a socialist country started to subside. And so, there was more of an interest in seeing how we can make companies more efficient.
At that time, there was a group of scholars at the University of Chicago who started to criticize the way antitrust law was enforced. In particular, there is this fellow who is not very well known outside small circles, but his name is Aaron Director. He was actually the brother-in-law of Milton Friedman. He was teaching at the law school. He was one of the first economists to actually teach at the law school, and he was co-teaching with a famous law professor that later became president at the University of Chicago, Ed Levi, who had just been assistant attorney general for antitrust.
He had come back from trying to enforce antitrust, and Aaron Director ridiculed every case he was bringing, making fun of the lack of consistency and logic that they were applying. One case that became very famous is the so-called Utah Pie case in 1967. There was a company outside of Utah who entered the Utah market offering a price that was lower than what the existing producers were producing, but also lower than what that company was offering anywhere else. For consumers, that’s great because you get your pie at a lower price. However, this might be a way in which you eliminate the competition.
This particular decision was in violation of the Robinson-Patman Act that was a later addition to the Antitrust Act. They were saying that as a distributor, you couldn’t charge different prices to different clients. All economists started to complain because they said this is really protection of competitors, not protection of competition, and this is not proconsumer, it’s pro-producer.
And so, they started to elaborate, or at least they wanted to have a consistent way to analyze all these cases, saying the secret of a good system of law is that it is applied consistently. But if we don’t have a very clear standard, how can we be sure that judges who are not economic experts will arrive at the same decision in a different situation? We must develop a consistent standard, and this is where Bork comes about.
Bethany: Bork’s role in all of this is so interesting because we all tend to think about him through the lens of culture wars, which is what seemed to matter for a very long time, and I think there’s a very powerful argument to be made that his impact was actually much more powerful in an area about which no one was thinking.
Luigi: Paradoxically, what I think is that Bork had a phenomenal marketing strategy. The existing paradigm of the time was called structure-conduct-performance. There is a structure in the industry given by exogenous factors that leads firms to behave in a certain way, and this leads to a certain level of profitability.
It was very easy to determine whether there was excessive concentration. Concentration itself was bad, and you have to break up firms, et cetera. At the time, again, the court sometimes went overboard. There is a case in which two supermarkets merged in the Los Angeles area, and the combined market share of the two was only 7.5 percent, and they thought that that was excessive, and they prevented the merger. In this context, there was growing dissatisfaction and a growing desire to introduce some element of efficiency. We want to promote competition that might improve the economic pie for everybody.
However, the antitrust issues are not just issues of efficiency. They are also issues of distribution. Robert Bork finessed this by being strategically ambiguous. He introduced this concept of consumer welfare that does not really exist in economics. If the market price of your favorite perfume is $100—probably your perfume costs more than $100, but let’s say $100—but you really value that perfume at $200, that $100 difference is your consumer surplus.
However, there is also something called producer surplus. That producer probably produced the perfume for $20, sorry to tell you, and then charges you $100, so that $80 of difference, that’s the producer surplus. If you sum the consumer surplus and the producer surplus, you have the total surplus, often called welfare. By using the term consumer welfare, Bork sounded like we were caring about consumers, but in fact he was kind of saying that we’re caring about total surplus.
My colleague Randy Picker at the conference that we organized last April made a phenomenal brief speech about how, in three different publications of Bork, Bork uses three different concepts and sometimes even two concepts in the same article. He keeps flipping between the notions of total efficiency, total surplus, and consumer interest. This made it appealing to the people. We want the lowest price. Who is against the lowest price? Nobody.
Also, it makes it kind of similar to what the court was trying to do. The court tries not to allow mergers if the merger increases prices. On the other hand, by sneaking in the concept of efficiency, he introduced the possibility for economists to justify anything.
I’m sorry to say, but we economists can make anything look efficient. Honestly, there is a theorem that says any point can be an optimal point if you properly define the utility function. If you don’t specify exactly what the goal is, I think that that could be efficient. And because the goals are vague, this notion of efficiency is very powerful as an instrument of defense.
Just to give you the sense of how contrary to common sense this is, if we introduce price discrimination, as economists, we can argue that this enlarges the size of the market, and so this is efficient. People don’t like to hear that.
Bethany: No. One of the most powerful phrases or concepts and always worth remembering is that any kind of model is always garbage in, garbage out. If you don’t look at the assumptions that the model is making and the inputs, then you have absolutely no idea of the validity of the outputs. It’s such a basic idea, but it’s one that fools people from time immemorial.
I also find it fascinating that the concept that most laypeople know of as an economic concept, the consumer welfare standard, isn’t actually an economic concept. That’s really interesting.
Isn’t another problem, though, with that consumer welfare concept of the world that it doesn’t take into account employees who are also consumers? If you have something that’s really good for consumers, but it’s resulting in lower wages for employees or fewer work opportunities, then given that, in a society, employees and consumers are the same people, isn’t it problematic just to measure everything by the welfare of one and not by the welfare of another?
Luigi: If you talk to basically everybody who supports the consumer welfare standard, they will tell you that it includes workers. In fact, it includes all the contracting parties. I see your face sort of perplexed and rightly so because you’re thinking, why did they do that? And this is what to me was very revealing when I chaired this panel that I’m referring to at the conference. There was this legal scholar, Eleanor Fox, who basically said that the consumer welfare standard, and I’m paraphrasing her a little bit, is a political concept to keep people out. It is an ideological principle to say what we should care about and what we shouldn’t care about in antitrust.
And basically, what we shouldn’t care about, according to this view, is nonmarket forces. I discussed this in this panel. I discussed it with Carl Shapiro, who is a leading IO economist, a leading expert, a very progressive guy. He was in antitrust with Obama, he believes in antitrust for workers, et cetera. But he’s absolutely adamant about the fact that you don’t want to include in any economic calculation or antitrust any political issue—including, for example, the ability to lobby.
So, one of the debates we had at the conference is, imagine you are a cement company, and you merge, and by merging you are better able at lobbying against anti-dumping laws, and that changes the nature of competition because you change the regulation of cement companies.
Do you want to factor that in, in your notion of economic efficiency, or not? Carl Shapiro says, “No, I think it’s very important to have laws for lobbying, blah, blah, blah, but that’s another chapter. It should be another person’s business. It should not be part of antitrust.”
The neo-Brandeisians say, “No, it should be an integral part of the discussion.” I am more moderate, but I do think that this is squarely in the debate of antitrust. It would be silly, in my view, to leave it out. If you want to see a big consequence of the Chicago approach to antitrust, the economic approach to antitrust basically forces out all this from consideration from the discussion of antitrust.
Bethany: Before we get to the conference, can you summarize, since the consumer welfare standard was enacted, since the time of Bork, how would you summarize the last four or five decades of antitrust? Can we just say lax? Lax enforcement? A flawed standard and lax enforcement? Or does it get more complicated than that?
Luigi: It’s a little bit more complicated. Let me divide antitrust enforcement into three categories. There is what is called in jargon Section 1 cases. Section 1 refers to the Sherman Act and says that is illegal to have price fixing. Everybody thinks that price fixing should be illegal. Bork thought it was illegal. Antitrust enforcement against price fixing has been strong. In fact, at the beginning of the ’80s, it was even stronger than before. Could we do better? We can always do better, but I think it is not really the issue there.
Then there are Section 7 cases. Section 7 refers to the Clayton Act about mergers. This is the reason why, when you have an acquisition, the acquiring company communicates this to the DOJ and the FTC. The FTC reviews and decides whether to challenge this merger or not. And it’s been very weak, in part because the merger guidelines were reshaped once by the Reagan administration in 1984, but they were also reshaped by the Obama administration in 2010. Ironically, that made it easier to have mergers. It is common to blame all the damage on the Republicans. Now, they’ve done a lot of it, to be fair, but they’re not the only culprit here.
This is a combination of factors explaining why this has been so weak. One other factor is the amount of money that companies have to challenge the FTC and the DOJ and the weakness of the FTC and the DOJ. But another is that economic arguments are very often used to undermine the reason for enforcement.
By the way, the consumer welfare standard is mostly a political argument and an academic argument. When it comes to judicial decisions, they tend to look at whether prices go up. However, the interesting thing is, take a merger, how do you know whether prices will go up?
That’s where you need to have models. You need to have the economists, and this is where the economists show their brilliance by proving the impossible. And the result is that you can always claim that this merger will improve efficiency and will not raise prices. The reality is that the very few retrospective analyses . . . by the way, it’s almost criminal, the fact that there is not automatically a retrospective analysis. The FTC and the DOJ, every time a merger takes place, they should follow up with what happened and see what types of mistakes they’ve made.
They don’t do that as a matter of course. But the few retrospective analyses suggest that, on average, mergers do increase prices. Even in the single metric that antitrust was enforcing, they fail. So, we need to be tougher against mergers.
Of course, there is not only prices; there is not only wages; there is also innovation. For example, in a very interesting case in the European Union, when Monsanto merged with Bayer, they were basically merging their R&D departments, and merging means cutting half of them. The effect on innovation can be pretty dramatic. And so, this aspect needs to be analyzed in a much more serious way.
This is where, in my view, the point that Oliver Hart made at the conference was brilliant. He said, “Look, these days we can obtain basically any benefit we can obtain with a merger through contracts.” The people merging should have the burden of proof to establish that they can’t obtain whatever synergy they claim they will obtain through any other form and that the only form is through merging. The presumption should be that the full reason why you merge is to have market power, and that’s the reason why we don’t want you to merge.
If you have another reason other than market power to merge, it is incumbent upon you to prove it in court. The beauty is that contracts are written and discoverable and to the extent that they violate antitrust, you can be sued, but in a merger, you don’t know what happened inside the company. You can do all sorts of dirty things, and you can’t stop them.
Bethany: You talked about price fixing, and you talked about mergers. Is there a third bucket that we need to touch on of antitrust?
Luigi: Yes, thank you for reminding me of this. There is a third bucket that goes under the name of Section 2 of the original Sherman Act, and this has to do with the so-called monopolization cases. These monopolization cases became extremely rare after the 1980s. There were many between the 1940s and 1980s, but after the 1980s they became extremely rare. Microsoft was one of those. And now some of the cases that are brought against Google are about this. Here is where economics has really undermined the ability to enforce antitrust. To the extent that you can make an argument that this is efficient, you might always block any enforcement.
You know, there is this debate about Epic, and Epic says, you, Apple, are taking 30 percent of my profits. This is the ultimate robber-baron kind of action. You know, the robber barons were these barons on the Rhine River who were extracting tolls for no reason. This is basically a toll extraction for no reason.
And the economists said: “No, no. Actually, this is a return on the investment that Apple made in creating this safe space, which is the app space, and they need to maintain it, et cetera, et cetera. And so, they need a return on that.” There are efficiency reasons to organize this way, and so you can justify exclusion, you can justify tying, you can justify anything, and that’s what makes the litigation of these cases a boondoggle for economists because they become filthy rich arguing in favor or against, but with not great results for the country overall.
Bethany: Maybe we should change the saying, and instead of it being that money is the root of all evil, it should be economists are the root of all evil. How do you feel about that?
Luigi: I would say monopoly is the root of all evil.
Bethany: Fine, fine, fine, fine. Kidding.
OK, so here we are today. You have this conference at the Stigler Center. Everybody says the Biden administration is being so much more aggressive about enforcing antitrust. Everything is changing. What was the tenor of the conference? Was there a feeling that the Biden administration is indeed being more aggressive about antitrust and that there is a big rethink of antitrust going on? Or is that not what’s actually happening?
Luigi: It’s very interesting because there is no doubt that the appointees of the Biden administration are very progressive in the antitrust space. In fact, I would say, probably more progressive than the median Democratic voter, let alone the median voter in the country. And President Biden himself made an executive order with very strong words and very powerful language. So, clearly, there is a lot of emphasis on this dimension.
My big disappointment is that we have not seen any legislation, but we recently saw a new set of rules called merger guidelines that are supposed to shape what kind of mergers are easily allowed and which kind of mergers are challenged. This is really an important piece of regulation that has just been released in July. You should really watch the discussion about the guidelines because I think there is a lot of opposition to these guidelines so it is not obvious that they will survive intact as they were issued, and not even, obviously, that they will survive at all. So I think that it is really an important element of public policy we should all watch.
Not to mention the fact that last year at the conference, Jonathan Kanter had promised that before the summer, there would be at least one antitrust law passed. And even Ken Buck, a solitary Republican, a representative Republican, who is a very strong antitrust promoter, was confident that at least one of the three proposals sitting in Congress would go through, and they didn’t. I think it was a gigantic missed opportunity.
Bethany: Is it too simplistic to say that it’s just an example of corporate power at work that we don’t see this happening, when everybody said it would happen?
Luigi: I think people are very reluctant to speak, especially on the record, on why that failed. My presumption is that you’re right, but I think that we need to do some digging.
Bethany: A couple of last questions. We began this episode by talking about how the United States really was the pioneer in antitrust enforcement, but it appears that now Europe is ahead of us in many ways. Are there lessons we can learn from Europe’s approach? And why has that flip-flop taken place?
Luigi: I think now they are rejecting it, and they are going back to more of the older liberal tradition, which is not that far . . . It’s a little bit more structured, but it’s not that far from neo-Brandeisian, to some extent. There is an interesting difference here, and of course there are enormous institutional differences.
One of the big advantages of the European Commission is that they can enforce their decision, and then the company challenges them and goes to court. In the United States, the FTC and the DOJ have to ask the court to enforce their decree. The bargaining power is completely different, and that’s the reason why they can act in a much more aggressive way.
Bethany: I want to pause with the last comment that you made at the conference about the importance of economists not substituting their expertise for the values of a democracy. And it reminded me a little bit of our episode with Elizabeth Popp Berman and her warnings about economic arguments, but I wanted you to expand on that for our audience because I thought it was a really important and interesting point.
Luigi: Yes, this is something that I’ve been thinking about for a while, even before I read the book by Elizabeth Berman. I think that the tools that economists develop or have developed are very powerful, but as with all the powerful tools, sometimes you can be inebriated and miss the forest for the trees. They say, “Oh, but what we’re doing is efficient,” but it’s a bit like if you define what counts and what doesn’t count as efficiency, then of course, you get to win. But if I get to decide what counts, I get to decide what happens.
Bethany: On a closing note, I actually love this idea. I don’t know if you meant it the way it came out or the way I heard it, but I love this concept of being inebriated with ideas. I think I’m going to go think about that, and instead of having a glass of wine, maybe I’ll go read a book.