Anti-Trust Part One

There are a set of laws in America that are believed to increase productivity and efficiency in the economy. These laws are called anti-trust laws, and they include; The Sherman Act, The Clayton Act, The Federal Trade Act and many more. The ideologies and their subsequent laws have subjugated our best producers to irrelevant and counterproductive practices. Alan Greenspan in 1961 called the anti-trust laws “reminiscent of Alice’s Wonderland: everything seemingly is, yet apparently isn’t, simultaneously. It is a world in which competition is lauded as the basic axiom and guiding principle, yet ‘too much’ competition is condemned as ‘cutthroat.’”[1]

Anti-trust in essence is a set of laws to ensure that competition is kept on a more even keel. That there can be no business which comes to power and ‘monopolizes’ any industry i.e. has complete control over said industry. Anti-trust legislation derives much of its intellectual power from a few ideas. One being the idea of ‘pure’ or ‘perfect’ competition; this is the idea that the best and most efficient market is one in which there are many sellers of a product all who make no real profit and who have absolutely no effect on the market price. Economists for over a hundred years have been building models off of this idea, coming to conclusions based off faulty assumptions. Some of the assumptions used, by economists, are noted in Dr. Armentano’s book Antitrust and Monopoly: “The model begins by assuming that a substantial number of small firms already exist in some relevant market, and that they are already producing homogeneous products.”[2] As was said earlier these atomistic firms have no control over the market price since the products are all homogenous (the products are the same in the eyes of the consumers). This also means that although in the short run some economic profits are possible, under these assumptions in the long run what is called “normal” profits will occur. Normal profits means marginal revenue will equal marginal costs and there will be no real profits made in an industry because entry and exit into this particular industry is open and easy.

The idea of a ‘pure’ competitive market is not what most economists believe is absolutely necessary. They do not think that the market needs to be so extremely competitive, in this sense, but simply that they use this idea as a benchmark to determine efficiency. They claim we need certain regulatory policies to help us bring in a more ‘purely’ competitive market.

Another area these legislations get their power from, which also derives from the ‘pure’ competition idea, is the idea that such things as mergers (vertical), tying agreements, gouging, product differentiation, advertising, price discrimination and more are all considered detrimental to a free and pure competitive market. Anti-trust laws are set out to destroy these business practices.

The Sherman act of 1890, which is the first industrial policy in America, had an effect on American businesses which is almost impossible to fully perceive. The way in which the law is stated and implemented is all but impossible to actually follow within the guidelines, in other words, the Sherman Anti-trust Act is absolutely arbitrary. To quote section two of the Sherman Act “Monopolizing trade a felony.”:

Every person who shall monopolize or attempt to monopolize, or combine to
conspire with any other person or persons, to monopolize any part of the trade
or commerce among the several states, or with foreign nations, shall be deemed
guilty of a felony. (Emphasis mine)[3]

As Greenspan said in his essay:

No one will ever know what new products, processes, machines, and cost-saving
mergers failed to come into existence, killed by the Sherman Act before they
were born. No one can ever compute the price that all of us have paid for that
Act which, by inducing less effective use of capital, has kept our standard of
living lower than would otherwise have been possible.[4]

By implementing this law America has subjected the producers to the whim of any judiciary or politician who wishes to ‘make an example’ of those who they perceive are being greedy or unethical in some manner.

The Clayton Act of 1914 specifically stopped tying agreements and mergers that would allow a company to attain a ‘majority’ of the market. A tying agreement is when one company leases or sells a product with the sole agreement that the purchaser shall buy or lease some other product sold by the producer. Mergers, usually either horizontal or vertical, are also condemned. Vertical mergers occur when a manufacturer of some product purchases the distribution centers for its products such as the retail stores that sell it. One of the largest and best known of this type of merger was the Standard Oil Company which had in effect owned almost everything needed to produce and distribute their product, kerosene.

Proponents of anti-trust legislation explain that horizontal agreements; such as joint ventures, price agreements and horizontal mergers, are a root cause for economic inefficiency which can reduce output and increase price. Generally this is taken into effect using what is called the ‘rule of reason’ in which the courts decide the probable social costs possibly being lost if the merger is not allowed. The social costs can be very high; these mergers can bring about substantial cost savings in production and distribution, also in industrial research and product development. Also they may come up with entirely new products and services that might otherwise not be possible.

HISTORY

The idea that there was a need for the government to interfere in the market in order to ensure there was this ideal type of competition, mainly started after the Civil War. The railroads played a big hand in the coming of anti-trust legislation and over one hundred and forty years of government interference in the business sector. In the eastern United States before the civil war the railroads had to deal with heavy competition. This not only included other railroads but also other forms of transportation, including barges, riverboats, and wagons. In the 1860’s there was an outcry to move the railroads to the west, and therefore connect California to the rest of the country. The railroads however, did not see enough profit in building all that was needed to make the move to California, especially not simply for ‘the public interest.’ This brought about the government subsidizing the railroads and in essence giving them the edge they needed to become a monopoly. During the time between 1863 and 1867 the Federal government granted the railroads close to one hundred million acres of public lands, and these lands granted were given to specific individually owned railroads, which gave that particular company the ability to break away from the competition of the other railroads, as well as the other forms of transportation.[5]

These government aided railroad companies in the west were able to act like a ‘true’ monopoly in the very textbook sense of the word. Again, this arbitrary power they had accrued was made possible exclusively because of the government interference into the transportation industry. As the west grew however, it opened up the transportation field to more competition, which the railroads had a hard time dealing with. This is where an “Ominous turning point had taken place in our economic history: the Interstate Commerce Act of 1887”[6] This act in effect allowed the government to all but fully control the railroad industry. It is still thought to this day that these regulations were necessary because of the obvious monopoly the railroads had, but the reality is that the monopoly the railroads were able to attain came directly from government interventionist policies. This then lead to the belief that the government had to continue to regulate the business industry. These same beliefs eventually led to Americans fear of the formidable “trusts.” A trust is a legal entity that owns several smaller companies each with their own duties in the larger trust. The most formidable and well known of these was the Standard Oil Trust ran by John D. Rockefeller.

THE MYTH OF THE STANDARD OIL MONOPOLY

The majority of the myth of the greedy and monopolistic company Standard Oil actually stemmed from a woman named Ida Tarbell a journalist in the early 20th century. Ms. Tarbell perpetuated the myth that before Rockefeller came on to the scene the petroleum industry was a perfectly competitive market and the men involved all enjoyed great and prosperous lives. Ms. Tarbell tells with vivid detail of the men, using many real names, which had been involved and had enjoyed with confidence their achievements, and she exclaims that these men looked forward to the future of their industry with eagerness and joy, then, as Tarbell explains it:

…Suddenly, at the very heyday of this confidence, a big hand [Rockefeller’s]
reached out from nobody knew where, to steal their conquest and throttle their
future. The suddenness and the blackness of the assault on their business
stirred to the bottom their manhood and their sense of fair play.[7]

This view propelled the hatred for large trusts and especially Standard Oil. This is still believed mostly true to this day. As philosopher Alex Epstein explains in his article Vindicating Capitalism: The Real History of the Standard Oil Company. “Pick a modern history or economics book at random and you are likely to see some variant of the Lloyd/Tarbell narrative being taken for granted.”[8]

Standard Oil was accused of many things including; predatory pricing, receiving special rebates from railroads, collusion, and more. As the story continues these ‘predatory’ and ‘anti-competitive’ practices forced companies to sell their holdings to Standard Oil or risk losing everything. It was almost as if Rockefeller was holding a gun to their heads. This idea has convinced the majority of people that in a openly free market it is possible for a corporation to come into existence that will take over all else and become a ‘coercive’ monopoly, similar to the power a government has.

Ron Chernow author of the popular Rockefeller biography Titan; says, “[Rockefeller] had taught the American public an important but paradoxical lesson: Free markets, if left completely to their own devices can wind up terribly unfree.”[9]

As Epstein explains this is “the logic behind antitrust law, in which government uses its political power to forcibly stop what it regards as ‘anticompetitive’ uses of economic power.”[10]

This standard story of the Standard Oil Company is completely false, Standard did not ever have a monopoly, the company was still subject to the laws of supply and demand, and the railroad rebates they received were not evil business practices but the product of extremely good foresight and ingenuity. Moreover, Rockefeller’s Standard Oil revolutionized the way business was conducted and led the way to the ever increasingly high standard of living American’s today enjoy.

Before Standard came on the scene most people had to light their houses with sperm whale oil, which was very expensive, usually only the rich could afford such things. The majority of the world had to stop any productive activities once it got dark. Once petroleum was discovered to have certain properties to allow for long lasting light, mainly kerosene, it allowed for a whole new world to open up. People now had easier access to light and could enjoy such activities as reading at night, among other amusements, especially in the winter season.

At the beginning of the petroleum industry the process of refining and distributing kerosene was, as expected, very crude. The refiners had used, for storage, expensive barrels costing upwards of $2.50 a barrel; they would then load them onto barges, wagons or railroads, each having to make numerous stops, since the majority of these refiners could only produce a few barrels at a time. Along the way to their destination, these barrels would often fall off, leak, and even explode. Even after finally making it into the homes of customers the kerosene would still explode and kill many people, this was a huge problem in the 1860’s and even 70’s. This problem is actually the reason Rockefeller named his company ‘Standard Oil.’[11] These early refiners also were very inefficient in the distillation of crude oil. Usually using only a small fraction of the actual oil, the fraction was usually kerosene, and the rest was thrown away.

Rockefeller came on the scene and almost immediately began cleaning up the mess that was the petroleum industry. Some of the major accomplishments are diametrically opposed to the rhetoric most hear on the subject of Standard Oil. For one, Standard did not restrict output nor did it stop any new competition from entering the market. A little known fact is that Standard’s market share in petroleum refining declined from “roughly 85 percent in 1890 to 64 percent in 1911. In 1911, at least 147 refining companies were competing with Standard, including such large [vertically integrated] firms Gulf, Texaco, Union, Pure, Associated Oil and Gas, and Shell.”[12] It is interesting to note that when the anti-trust case against Standard was initiated in 1911 all this was going on. Yet Standard was still forced to break up their holdings and was put at a large disadvantage with their competitors, at no real fault of their own. Another important fact to note was that instead of the popular myth that Standard had achieved a monopoly power and thusly began to raise prices, it did the exact opposite. Standard had lowered costs and consequently lowered prices, “Prices for kerosene fell from 30 cents a gallon in 1869 to 9 cents in 1880, 7.4 cents in 1890, and 5.9 cents in 1897.”[13]

What happened to Standard is very logical when looked at in a historical setting. There was a large shift in two areas which affected Standard. One was the invention and mass production of the light bulb and the subsequent electricity boom. This had a large impact on Standard Oil mainly because the company’s main revenue source, kerosene, was becoming more and more obsolete. The second source of a shift away from Standard Oil was the different uses for crude oil, Standard had a hard time keeping up with; this of course was the use of gasoline. What all this shows is that anti-trust legislation was not the cause of Standard’s decline, but the open and free market was.

If one is to try and study Standard it is important to first understand what Standard oil specifically did to improve upon the industry. When Rockefeller first invested in the refining of oil in 1863 he did not set up shanty refineries as did most people at the time, he instead invested and created the largest refinery in Cleveland: Excelsior Works. Almost immediately Rockefeller was improving the distillation process and was soon producing more than 505 barrels a day in opposition to most refiners at the time who were only producing around 5 barrels a day. He also bought land for his refinery in a place where he would be able to ship his oil by land and sea, which would come in handy later on when Rockefeller was negotiating with the railroads.

Probably one of the most important characteristics of Rockefeller was his keen accounting skills. He was able to drastically cut costs throughout his whole reign at the helm of Standard Oil. One way in which he accomplished this was by cutting costs of transporting oil in barrels. Instead of relying on the ‘unreliable’ barrel makers he simply began making his own barrels, this helped drop his costs for barrels from $2.50 to under $1 a barrel. He also hired and trained his own purchasing agents, “which eliminated the need for paying ‘jobbers’ (purchasing middleman)”[14]

All in all, Rockefeller’s Standard Oil Company did not monopolize nor destroy any industry. He in fact revolutionized the industry, cut costs, increased output, and drastically reduced prices; he also invented the idea of companies investing in research and development. For this he was punished and forced to break apart a business he spent a lifetime building. The impact of anti-trust laws on Standard Oil was very drastic, but unfortunately not the only time it has happened. It has happened repeatedly and dramatically throughout the history of anti-trust legislation. As was shown above Standard did indeed vertically integrate its operations, but this was not a ploy that was worthy of condemnation, but was worthy of praise. Standard achieved rebates from railroads not through so-called ‘scrupulous’ business practices, but through ingenious foresight and great business sense. In essence it was not any wrongdoing that Standard was condemned but in its efficiency.

Another famous anti-trust case, the Alcoa case of 1945, also illustrates the wrongdoing of these set of laws and the damage that occurs to businessmen’s lives.

In Part Two I will briefly go over other famous cases such as the Acloa case of 1945, The Borden Case, and some of the reaons behind California 2001 Energy crisis, including some other rather mushy problems these ideals incur.

ENDNOTES
[1] Greenspan Alan Antitrust [Book Section] // Capitalism: The Unknown Ideal / book auth. Rand Ayn. - New York : Signet, 1967. Pg 63
[2] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure [Book]. - New York : John Wiley & Sons, Inc, 1982. Pg 15

[3] Anthony D. Becker Ph.D. The Antitrust Case Browser [Online]. - April 16th, 2004. - Sept 9th, 2008. - http://www.stolaf.edu/people/becker/antitrust/index.htm.
[4] Greenspan Alan Antitrust. Pg 71

[5] Greenspan Alan Antitrust. Pg 64-65

[6] Greenspan Alan Antitrust Pg 65

[7] Tarbell Ida THE HISTORY OF THE STANDARD OIL COMPANY [Online]. - 1904. - Oct 10th, 2008. - http://www.history.rochester.edu/fuels/tarbell/MAIN.HTM. Pgs 36-37
[8] Epstein Alex Vindicating Capitalism: The Real history of the Standard Oil Company [Journal] // The Objective Standard. - 2008. - pp. 29-65.
[9] Chernow Ron Titan [Book]. - Vintage : Random House, 2004. Pg 297
[10] Epstein Alex Vindicating Capitalism: The Real history of the Standard Oil Company

[11] Epstein Alex Vindicating Capitalism: The Real history of the Standard Oil Company
[12] Armentano Dominick T. Antitrust: The Case for Repeal [Book]. - Auburn : Ludwig Von Mises Institute, 1999. Pgs 40-43
[13] Armentano Dominick T. Antitrust: The Case for Repeal. Pg 41

[14] Epstein Alex Vindicating Capitalism: The Real history of the Standard Oil Company

[15] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure [Book]. - New York : John Wiley & Sons, Inc, 1982. Pgs 100-103

[16] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 104

[17] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 111

[18] Greenspan Alan Antitrust pg 72

[19] Armentano Dominick T. Antitrust: The Case for Repeal. Pg 72

[20] Paul Ron and Armentano Dominick Anti-Trust and monopoly [Interview]. - Jul 13, 1983.
[21] Tracinski Robert W. Capitalism Magazine [Online] // Capitalism Magazine. - Jan 22nd, 2001. - Oct 14th, 2008. - http://www.capmag.com/article.asp?ID=159.
[22] Cunha Mark Da Capitalism Magazine [Online]. - June 10th, 2001. - Oct 14th, 2008. http://www.capmag.com/article.asp?ID=922
[23] Sowell Thomas Basic Economics: a Common Sense Guide to the Economy 3rd edition [Book]. - New York : Basic Books, 2007. Pg 156
[24] Sowell Thomas Basic Economics: a Common Sense Guide to the Economy 3rd edition Pg 156

[25] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 14

[26] Armentano Dominick T. Antitrust: The Case for Repeal

[27] Sowell Thomas Capitalism Magazine [Online] // Capitalism Magazine. - June 28th, 2003. - Dec 13th, 2007. - http://www.capmag.com/article.asp?ID=2892.
[28] Rand Ayn America's Persecuted Minorty: Big Business [Book Section] // Capitalism: The Unknown Ideal. - New York : Signet, 1961