Trust-Busting

The Original Gilded Age

There was a national debate about that question during the presidential election of 1912. That was during the Gilded Age, a time much like our own, when enormous wealth—and with it, political power—was flowing to giant corporations and the moguls who controlled them, men such as Andrew Carnegie, J. P. Morgan, John D. Rockefeller, Sanford Dole, and Cornelius Vanderbilt. These corporations had grown into behemoths by not so much outperforming their rivals in fair competition as by destroying them through predatory practices, conspiring with them to divide up business and cheat the public, or, best of all, buying them. The giant “trusts,” as they were then called, were not merely big corporations but combinations of big corporations. United States Steel Corporation, for example, combined with or acquired no less than 228 separate companies.

Consider for a moment the parallels between the original Gilded Age and today. During the past decade, the chemical company Monsanto purchased more than thirty companies, the computer giant Oracle acquired more than sixty companies, and Google purchased more than 120 companies. In less than a decade beginning in the mid-1990s, more than eighty aerospace-defense firms merged into four dominant firms. In 1999, there were $1.475 trillion in mergers and acquisitions. It was a stunning number—triple that of just three years earlier. But 2015 set a new record with $4.7 trillion in announced mergers and acquisitions.

During the original Gilded Age, there was great alarm about giant corporations devouring independent firms through mergers and acquisitions. There were two separate though related concerns: one was increasing corporate size, and the other was decreasing corporate diversity. In 1890, Congress tried to address these problems by enacting the Sherman Antitrust Act. But even before the ink dried, pro-business federal courts interpreted the new legislation in ways that severely compromised its effectiveness as a tool against corporate monopolies—while finding that it was a perfectly fine tool for injunctions against labor strikes. ¹ Elephantine corporations continued to grow ever larger by stomping on or swallowing competitors and suppliers. Something more had to be done. But what?

[The year] 2015 set a new record with $4.7 trillion in announced mergers and acquisitions.

Antitrust became a topic of wide public debate during the 1912 presidential election. All four candidates—William Howard Taft, the incumbent president and Republican candidate; Theodore Roosevelt, the former president and Progressive Party candidate; Woodrow Wilson, then governor of New Jersey and the Democratic candidate; and labor leader Eugene Debs, the candidate of the Socialist Party—spoke about big business and what to do about it. The clash was particularly pronounced between the two leading candidates, Wilson and Teddy Roosevelt.

Wilson, who was advised on this issue by Louis D. Brandeis—a Boston lawyer whom Wilson would later appoint to the Supreme Court—complained that big business was turning rugged individualists into serfs. “You know what happens when you are the servant of a corporation?” Wilson declared. ² “Your individuality is swallowed up in the individuality and purpose of a great corporation.” He was particularly worried about corporations that became giants through the artificial means of mergers and acquisitions. “[T]hey are constantly buying up new competitors in order to narrow the field,” said Wilson.

Roosevelt agreed with Wilson about the dangers posed by giant corporations and the enormous wealth they generated for the men who controlled them. But although Wilson and Roosevelt agreed on the disease, they prescribed different medicine. Wilson believed that giant corporations were inherently undesirable. He was concerned about what Brandeis famously called “the curse of bigness.” By contrast, Roosevelt argued that giant companies were inevitable in the Industrial Age. As he saw it, only big companies could do big things. Roosevelt wanted to regulate, not break up, big businesses, and he wanted a government that was strong enough to keep big businesses on a leash. He criticized Wilson for naively wanting to return to a preindustrial age, and for being afraid of power—corporate or governmental. ³

Wilson and Brandeis believed that seeking to control giant corporations through regulation was doomed to fail because big business was so large and powerful and had such a strong interest in resisting regulation that it would control the government. Controlling big business through government regulation was a pipedream, argued Wilson, because big companies would collaborate to control the government instead. “Don’t you see that [big business] must capture the government, in order not to be restrained too much by it?” Wilson asked. ⁴

Congress Responds

Two years after his election, Wilson—again advised by Brandeis—sent legislation to Congress to strengthen the Antitrust laws, particularly with respect to conglomerate mergers, to provide that private parties who were injured by violations of the Antitrust laws could sue and recover three times the amount of their injuries plus their attorney fees, and to create a federal agency dedicated to ensuring consumers were not injured by unfair methods of competition. Congress passed both the Clayton Act and the Federal Trade Commission Act in 1914. However, neither the Clayton Act nor any Antitrust law set a limit on corporate size per se. There has always been a distinction between so-called natural growth, which is achieved by outperforming rivals, and growth through mergers and acquisitions. No one wants to punish ingenuity. As long as a company competes fairly and grows by offering superior products and services or lower prices, the Antitrust laws do not interfere. ⁵ Growing synthetically by devouring other companies is another matter, however.

The effectiveness of the Antitrust laws waxed and waned over the ensuing years. In the aftermath of both world wars, American businesses—flush with cash from having supplied everything the nation’s army and navy required, from tanks, planes, ships, and bullets to uniforms, blankets, bandages, and C-rations—went on buying sprees. The Federal Trade Commission reported that from 1940 to 1947, more than 2,450 formerly independent manufacturing and mining companies had disappeared through mergers and acquisitions. Concerned with what corporate bigness and industry concentration meant not just for consumer prices but for the civic fabric of the nation, Congress responded by passing the Celler-Kefauver Act, which closed loopholes in the merger provisions of the earlier Antitrust laws, and also prohibited any corporate merger or acquisition if its effect “may be substantially to lessen competition, or tend to create a monopoly.” ⁶ As the Supreme Court later put it, Congress did not want the courts to wait until mergers resulted in monopolies but to “arrest incipient threats to competition which the Sherman Act did not ordinarily reach.” ⁷

For a number of years, the Warren Court applied the Antitrust laws accordingly. Then the empire struck back.

The Chicago School

The counter-attack was not legislative nor even directly political. It was ideological. It began with a group of libertarian economists and law professors at the University of Chicago, and was later advanced by some of their students. Hence, this view has come to be known as the Chicago School.

The single most influential Chicago School advocate in Antitrust was Robert H. Bork, ⁸ who studied Antitrust law at the University of Chicago from a founder of Chicago School thinking. ⁹ His 1978 book, The Antitrust Paradox: A Policy at War with Itself, was enormously influential in creating a new consensus on Antitrust law.

“The only legitimate goal of antitrust law,” Bork wrote, “is the maximization of consumer welfare.” That is a highly reductionist statement. Bork was not saying that Antitrust has a number of goals but one is more important than others. He claimed that Antitrust has a single goal, and any other goal—even if advocated by legislators or courts—is somehow illegitimate.

What constitutes consumer welfare? Bork said that consumers decide that question in the marketplace; that is, consumer welfare comprises the wants that consumers seek to satisfy through their purchases. “Antitrust thus has a built-in preference for material prosperity,” he declared. It is on this assumption that the entirety of Bork’s theory rests. And that is what it is—an assumption and nothing more—for Bork supported his claim that Antitrust law’s only legitimate goal is consumer welfare merely through what lawyers call ipse dixit, which literally means “he himself said it” and refers to an argument supported by the author’s own declaration and nothing more. There are many prominent instances in Antitrust history when legislators, courts, and scholars recognized that other values were also important and sometimes trumped consumer welfare, but Bork ignored this venerable line of precedent.

[Robert] Bork argued, no wealth is destroyed when a monopolist obtains an inflated price. Wealth is merely transferred from one party to another.

Bork argued that, properly conceived, Antitrust law promotes allocative efficiency without unduly impairing productive efficiency. Allocative efficiency involves the allocation of resources in the general economy while productive efficiency involves the effective use of resources by individual firms. Allocative efficiency occurs when the economy produces a particular product at a price that reflects the marginal cost of producing that product. Under those conditions, consumers who are willing to pay the price of production, plus a reasonable profit, can obtain that product, and resources will flow toward the production of that product in accord with what consumers are willing to pay. Where there are greater demands, more resources will flow to meet that demand. By contrast, productive efficiency concerns how much it costs to produce the product. Productive efficiency increases if a firm finds a way to produce the same product at a lower marginal cost.

Because a monopolist has no competition, he is able to demand a price higher than the marginal cost of producing the product. This means that some consumers who would have purchased the product at a lower, competitive price will not do so. That, in turn, means fewer of those products will be produced. For Bork, the problem with monopoly pricing is not that consumers are gouged. Bork argued that the price may have risen to the same level if, for example, the cost of raw materials used in production increased. He also observed that consumers pay monopoly prices in situations that the law condones, such as when a seller has a patent on the product.

Moreover, Bork argued, no wealth is destroyed when a monopolist obtains an inflated price. Wealth is merely transferred from one party to another. Bork argued that wealth transfers “should be completely excluded from the determination of the antitrust legality of the activity.” That is a strange proposition. Suppose A holds up B at gunpoint and robs him of $100. No wealth was destroyed in that transaction either. A is $100 richer, B is $100 poorer, and total societal wealth remains the same. I imagine Bork laughing at this analogy. His reply, I expect, would be that legislatures may properly consider morality and income distribution effects in deciding to outlaw robbery, and courts are duty bound to enforce the criminal laws. Antitrust, however, is exclusively focused on economic matters, and, thus, courts must stick to economic objectives when applying them. That is, anyway, how I imagine his argument.

But what Bork and the Chicago School refused to acknowledge was that Congress was concerned with more than economics when it enacted the Antitrust laws. It was concerned with economic issues, to be sure, but it was also concerned with the sociological and political ramifications of consolidated corporate power. The historical record about that is indisputable. ¹⁰ And yet the Chicago School vision became the consensus view within the Antitrust fraternity—that is, among the lawyers, judges, economists, and scholars who specialize in Antitrust law. Moreover, it has largely been accepted across the political spectrum within that fraternity. Liberals have largely been reduced to quarreling on the margins while implicitly accepting Chicago School central premises. For example, liberals argue that consumer welfare should consider innovation and product diversity in addition to price. However, they implicitly accept the central tenet that Antitrust is exclusively about consumer welfare. Why?

The Chicago School sang a Sirens’ song of purported simplicity, objectivity, and scientific neutrality. If two companies want to merge, call in economists and ask: if these two firms are permitted to merge, will industry concentration be so great that the new firm will have the ability to reduce total industry output and raise consumer prices? ¹¹ If the answer is yes, deny them permission to merge. If the answer is no, permit the merger.

But what, at first blush, seems scientific and neutral is, in fact, neither. It is not scientific because economics is, in this context anyway, not a reliable science. While economists often claim to be able to predict when merged companies will be able to raise prices, they are frequently wrong. Retrospective merger analyses show that—among mergers that were large enough to be reported to Antitrust regulators, and were ultimately permitted by those regulators—65 percent resulted in price increases, with the average increase being nearly 10 percent. ¹² Moreover, while the Chicago School approach seems objective and neutral, it is, in fact, highly ideological. Ideology is, at bottom, about values—identifying those things a society wishes to pursue or protect, and ranking those things so that a considered choice is made when having more of one thing means having less of another. Under the Chicago School approach, the only things that are valued are total industry output and consumer prices. We want manufacturers and providers to produce more and charge less for all goods and services. Nothing else matters.

Discarded Values

Whenever mergers and acquisitions occur, previously independent firms disappear. With each firm that disappears, there is one less employer. As previously mentioned, fewer employers mean less competition for workers in wages, benefits, and work conditions. Just as competition among sellers of products tends to reduce prices, competition among employers tends to increase wages. One of the most disturbing and seemingly recalcitrant problems of our age is that wages have long been stagnant, even when corporations make large profits and CEOs receive enormous compensation. A recent study suggests that the wage stagnation that has been plaguing America results, in part, from less competition for workers due to mergers and concomitant industry consolidation. ¹³ Firms disappearing through mergers is also undoubtedly a contributing factor in this alarming fact: The number of firms exiting the American economy (whether through mergers, business failures, or otherwise) presently exceeds the number of new firms entering the economy. ¹⁴

. . . [T]he wage stagnation that has been plaguing America results, in part, from less competition for workers due to mergers and . . . industry consolidation.

An absence of healthy competition for workers not only tends to reduce wages as an absolute matter but also increases the gap between average workers and top executives. “Diminished competition . . . increases inequality by empowering corporations to hold down the income of workers,” two commentators have written. ¹⁵ Moreover, while mergers are bad for workers, they are wonderful for CEOs and a small cadre of very top executives, who persuade their boards of directors that managing what is now a larger firm warrants higher compensation. Indeed, executive compensation may be the true objective of many mergers. Although CEOs dazzle directors and investors with vague promises of achieving “synergies” and “efficiencies” through mergers, surely they know that when large companies acquire other firms of significant size, shareholder wealth is destroyed far more often than it is created. ¹⁶

Some merger failures are especially notorious. Bank of America’s 2008 acquisition of Countrywide is reported to have cost Bank of America $40 billion in addition to the $2.5 billion purchase price. ¹⁷ After it acquired Kmart in 2007, Sears’ revenue dropped 10 percent, causing a well-known financial analyst to declare Sears’ CEO the worst CEO of the year. ¹⁸ In 2000, Time and AOL crowed about merging to create the largest media company in the world, but the corporate marriage was a disaster, and the companies divorced in 2009. ¹⁹ These failures are hardly exceptional. Studies have shown that 70 percent of mergers between American corporations fail to increase shareholder value, and only 10 percent of mergers among European companies achieve their financial goals. ²⁰

Studies have shown that 70 percent of mergers between American corporations fail to increase shareholder value . . .

Why then do corporate executives repeatedly recommend mergers? It is easier to do big things—or at least appear to do big things—through mergers than by finding ways to run a business extraordinarily well. Carly Fiorina likes to boast that she doubled Hewlett-Packard’s revenue when she was its CEO. She is, however, not as quick to mention that she accomplished that by acquiring another very large company, Compaq, in a deal that was a disaster for her firm’s shareholders. ²¹ With Goliath self-confidence, CEOs probably persuade themselves that they possess the rare skill to make a merger work. But the reason they persuade themselves in the first place is that their own importance—not to mention their compensation—increases along with the size of their firm.

What happens to these CEOs when their mergers fail? Hewlett-Packard’s board of directors fired Carly Fiorina after they learned just how much the Compaq merger hurt their company, but they sent her packing with a $42 million severance package. ²² Workers do not fare as well. Each merger and acquisition reduces the number of potential employers. Even aside from the impact on wages, fewer employers means less diversity in employment opportunities. In an industry with many employers, a worker looking for a job has a variety of prospects. If one employer is a bad fit, a worker might find a more congenial spot somewhere else. Someone who feels unappreciated can look elsewhere.

What happens when diversity is destroyed through mergers? Take, for example, advertising agencies. A little background is necessary, and helps illustrates the problem. The British advertising company WPP has become an international conglomerate by merging with or acquiring more than 300 previously independent ad agencies, including such famous American firms as J. Walter Thompson, Young & Rubicam, Ogilvy & Mather, and Hill & Knowlton. Just as big fish are swallowed by bigger fish, and then in turn are swallowed by still bigger fish, WPP swallowed firms that had themselves become large by devouring other agencies. Although, today, the names J. Walter Thompson and Young & Rubicam live on, and appear—at least to outsiders—to designate independent firms, that appearance is a mirage. In previous times, someone who was unhappy at J. Walter Thompson might explore opportunities at Young & Rubicam; today, it is not that easy. An executive within the WPP behemoth remarked, “Every place I wanted to work was already owned by WPP. And I realized that to move, I’d need the approval of some grand poobah.” ²³

[W]hen diversity is destroyed through mergers . . . [workers have] no practical ability to seek a position with a different employer [and are] little more than . . . indentured servant[s].

As that remark so well illustrates, labor mobility is an important element of freedom. Someone who has no practical ability to seek a position with a different employer is little more than a serf or an indentured servant. This is, of course, a matter of degree; even when labor mobility is not entirely eliminated, freedom shrinks as the number of independent firms declines and industries become increasingly concentrated.

The Antitrust laws are about preserving competition. As a theoretical matter that includes all kinds of competition, including competition for workers, Antitrust regulators and courts will act if employers enter into an active conspiracy not to compete for workers, ²⁴ but when it comes to merger analysis, Antitrust is all about consumer welfare. Worker welfare is all but ignored. ²⁵ And yet, our lives as workers are at least as important as our lives as consumers. What we can afford to buy is determined just as much by wages as by consumer prices. For most of us, moreover, work is more than a means of earning money for consumption; it gives us the satisfaction of pulling our own weight and contributing to society, a sense of pride and self-worth, and in congenial workplaces at least, the joys of camaraderie and community. The present Antitrust paradigm discards other values as well. It ignores the damage to local communities when distant corporations acquire local firms and consolidate their operations at the parent company’s headquarters. ²⁶ It pays scant attention to data that show that there is less innovation in consolidated industries. ²⁷ In its single-minded belief that greater productivity is always an unalloyed good, it is bewildered when a state dental association enacts ethics rules aimed at preventing unnecessary dentistry or the National College Athletic Association (NCAA) restricts the number of televised college football games to protect college life, athletic amateurism, and academic integrity from the corrosive influences of unbridled commercialism. ²⁸ And it ignores one of the historically greatest concerns about corporate bigness: political power grows with company size and industry consolidation, with consequences for the democratic process and for the economy because corporations use their clout to acquire all manner of governmental favors and subsidies. ²⁹

A Counter-Revolution

We need a revolution—or perhaps more accurately, a counter-revolution—in Antitrust. The Antitrust fraternity has created a hyper-technical, bloodless instrument that focuses exclusively on consumer prices and total industry production, and ignores other critical values. The justification for this choice is that it dispenses with difficult debates over values, and that it replaces subjectivity with scientific objectivity. But, in fact, the reliability of the economics involved is, at best, questionable. Even more important, the baby has been thrown out with the bath water.

The present Antitrust paradigm . . . pays scant attention to data that show that there is less innovation in consolidated industries.

The labor movement needs to become involved in this counter-revolution for at least three reasons. First, as firms disappear and industries become more consolidated through mergers and acquisitions, there is less competition for workers. That helps keep wages stagnant. Second, fewer employers means less workplace diversity. Even aside from matters of salary and benefits, less choice in jobs negatively affects the quality of life of workers and their families. Third, as corporations become larger and their industries become more consolidated, big business becomes more politically powerful. Size, after all, is a major source of power. Big business deploys its political power to extract all kinds of favors and benefits from government, including keeping labor unions and the National Labor Relations Board weak.

Political power grows with company size and industry consolidation . . . because corporations use their clout to acquire all manner of governmental favors . . .

Georges Clemenceau, French prime minister during World War I, once famously declared that war was too serious to be left to the generals. Similarly, Antitrust policy is too serious to be left up to the Antitrust fraternity. Just as was the case during the election of 1912, Antitrust needs to be an area of wide public attention and debate. People are not just consumers. They are also workers and citizens living in a constitutional democracy. Yet, although there is much research about how Antitrust doctrine affects consumer prices and total industry production, almost no attention is given to how Antitrust affects workers and the democratic process. It is critical that labor economists study how Antitrust policy affects employment rates, wages, benefits, and income inequality; that sociologists study how Antitrust policy affects the quality of life of workers and families; and that political scientists study how Antitrust policy affects corporate power. Meanwhile, the labor movement cannot afford to be blind about an area with profound effects on its effectiveness and objectives. It needs to help instigate a counter-revolution in Antitrust.