October 22, 2024
By Ethan Yang
On October 10, the Department of Justice suggested that it would seek the breakup of Google’s online search system following a victory at the District Court level. Although the company is expected to appeal the ruling, the initial victory and shocking suggestion that Google be forced to divest major parts of its business represents a milestone for proponents of the Biden antitrust agenda which has been largely stifled by the judicial system. Proponents of this agenda seek to push American doctrine away from the efficiency maximizing consumer welfare standard to a more populist and aggressively anti-monopoly model that presumes harm from market concentration. At such a pivotal moment in American political economy, it would almost be cliché to ask “what would Adam Smith, author of the Wealth of Nations and the man commonly attributed for outlining the free enterprise system, think about the state of US antitrust enforcement.” Curiously, even those who advocate for more intervention claim his views support their cause. It goes without saying, that the Scottish economist has some timeless advice on promoting economic competition and but the populist who invoke Smith misconstrue his insights.
Earlier this year on June 5, 2024 the US Senate Judiciary Committee held a hearing on the danger that increased economic consolidation poses to economic vibrancy. Some of the witnesses proposed radical but politically fashionable ideas that sought to leverage current economic struggles, such as supply chain woes and competition with China as a reason to target large corporations with antitrust laws. At the end of the hearing, Senator Amy Klobuchar, chair of the antitrust subcommittee made a peculiar invocation of Adam Smith. She reminded the audience that it was Smith who warned the world and the American Founders about the threat monopolies posed to the capitalist system and even democracy.
This out of context reference to Adam Smith’s concern with monopolies is commonly invoked by populist antitrust reformers such as Senator Klobuchar. Ironically, a faithful reading of Smith’s concerns about monopoly centered around the intersection of government regulations and private interests, not the natural consequences of free enterprise. Therefore, antitrust enforcement that wishes to honor the historic tradition of antimonopoly enforcement should focus on striking down government barriers to competition.
Adam Smith in Context
Smith’s opposition to monopolies is representative of a traditional strain of thought in England dating back to at least the 16th Century. At the time, many significant thinkers worried about the power of dominant businesses supported by government privileges such as exclusive rights over commerce and carveouts in trade agreements. In writing about why he doubted that Britain would ever practice truly free trade he wrote,
To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it… manufacturers set themselves against every law that is likely to increase the number of their rivals in the home market.
In this case, Smith was referring to the vast array of businesses with special privileges that enabled them to operate with little competition. For example, it was common practice in many European states to give certain companies the sole rights to goods produced by colonies overseas. In other cases, states would force colonies to only trade with the mother country through a specific port, incentivizing shipping companies operating out of the port to engage in price collusion.
One of the most famous, or infamous, English monopolies at the time was the East India Company, a trading business authorized by royal charter. The charter, or patent as they were also called, granted a complete monopoly on all trade with countries east of the Cape of Good Hope and west of the Straits of Magellan. The East India Company faced no competition because of its legal status and when Parliament attempted to authorized another entity to compete the two firms merged to create the United Company of Merchants of England Trading to the East Indies. Understandably, the company enjoyed tremendous profits and continuously lobbied Parliament to prevent the deregulation of the trading industry. Eventually, gradual deregulation of East Indian markets would dimmish the company’s hold on power slowly from its first charter in 1793 to its last in 1853.
Alongside Adam Smith, the great legal mind, William Blackstone wrote about monopolies in his Commentaries on the Laws of England where he noted the penalties levied against monopolists as well as efforts to curtail their power. Similarly, Blackstone wrote of monopolies as inventions of the state and defined them as “being a license or privilege allowed by the king for the sole buying and selling, making, working, or using, of anything whatsoever; whereby the subject in general is restrained from that liberty of manufacturing or trading which he had before.”
Although attitudes about the role of monopolies in England varied, the historical conversation about economic competition and anti-monopoly law was fundamentally concerned with the role of government rather than naturally obtained dominance.
What Our History Can Teach Us Today
The English common law tradition prior to the advent of modern competition laws such as the Sherman Antitrust Act, which broadly targets private business conduct, was justifiably concerned with government monopoly. Our predecessors understood that in a dynamic market economy, the greatest preservers of excessive market power were special privileges that could only exist with state intervention. These included exclusive trade deals, royal charters, and trade guilds. Although it was possible for private actors to exploit market power on their own, these positions were often unsustainable without state-imposed barriers to entry.
The contemporary focus on largely naturally obtained market positions, such as Google’s dominance in search engines or Amazon’s control of online retail radically departs from the original concerns of antimonopoly law. Although companies like Google and Amazon maintain dominant market positions, they do so largely from the voluntary actions of consumers choosing their products over others. This is much different from the companies that were given legal monopoly or generous state privileges.
Of course, that is not to say that we should turn a blind eye to the market dominance and alleged misconduct of corporate giants like Google and Amazon. Afterall, antitrust statues such as the Sherman and the Clayton Act were drafted precisely to target private companies irrespective of government assistance. History however, both English common law and American jurisprudence, should give us pause when confronted with populist reform efforts centered around policing economic consolidation for consolidation’s sake. Efforts to eliminate government monopolies rested on the tested truth that only state power sustainably suppress market competition, intervention into purely private markets risks punishing superior competitors and supporting less efficient firms. Furthermore, the condemnation of purely private activity, such as price fixing and cartels, is derived from the notion that such arrangement have little redeeming value and solely exist to undermine competition at the expense of consumers. The common link between English common law and American antitrust jurisprudence is the preservation of meritorious economic competition that serves consumers rather than competing firms.
However, populist initiatives such as the FTC’s lawsuit against Amazon target conduct that increases competition on the basis that in the speculative long run, competition might be harmed. For example, the FTC lawsuit takes issue with the fact that Amazon’s Prime subscription service, which gives users perks such as free two day delivery, requires third party sellers to guarantee Amazon has the lowest prices. If a retailer does not comply with Amazon’s request their products will lose certain promotional privileges, putting them at a steep disadvantage to others.
The FTC argues this arrangement stifles competition because competing platforms will be denied the ability to compete on prices. However, the argument commits two errors, the first being that it completely ignores the lower prices offered to consumers conferred by this voluntary arrangement and neglects to consider the innovative pressures created by this vertical restraint. Vendors are not entitled to preferential treatment on Amazon and can offer lower prices on other platforms that give them such treatment. Furthermore, such an arrangement incentivizes competition through other means, like offering different products that Amazon doesn’t have access to, selling more boutique items, or promoting products in a completely different manner. The FTC’s logic in this matter seems to embrace the thoroughly repudiated reasoning in Brownshoe v. US (which the Biden Administration loves to rely on) which held that a company’s ability to outcompete competitors on prices and quality would actually be anticompetitive because it would increase market share. Such reasoning not only veers off into the deep end of speculative central planning but also supports less efficient competitors and prohibits what is otherwise a rational business decisions on the basis that Amazon is “too big”.
Attacking market leaders like Amazon to benefit smaller competitors might make markets less efficient by offering smaller firms artificial advantages over industry leaders. Those who believe that the American economy is suffering from a lack of competition should instead focus on lifting government imposed barriers to entry that stifle price and quality competition in key industries. Removing barriers include both explicit restrictions such as occupational licensing boards that determine who is able to offer professional services, regulatory costs disadvantaging smaller competitors, and government programs such as the financial assistance given to select American automotive companies during the 2008 Financial Crisis.
Although antitrust law has evolved beyond targeting state enabled monopoiles, the link between government action and the maintenance of undue market power is a lesson that will always be relevant. With antitrust and economic concentration being a key topic in contemporary discourse, policymakers should remember the proven lessons from our country’s English tradition and focus on removing cronyism embedded in the regulatory state. Refocusing on cutting red tape and refraining from picking winner and losers in the market is an economically sound approach that avoids controversial lawsuits that may ultimately cause harms that are ultimately passed on to consumers.
Ethan Yang is an Adjunct Research Fellow at AIER.