In Antitrust We (Do Not) Trust

British economists on competition policy (1890-1920)

By Nicola Giocoli (giocoli@mail.jus.unipi.it), University of Pisa

URL: http://econpapers.repec.org/paper/pramprapa/39245.htm

Abstract

Most late 19th-century US economists gave a rather cool welcome to the Sherman Act (1890) and, though less harshly, to the Clayton and FTC Acts (1914). A large literature has identified several explanations for this surprising attitude, calling into play the relation between big business and competition, a non-neoclassical notion of competition and a weak understanding of anti-competitive practices. Much less investigated is the reaction of British economists to the passing of antitrust statutes in the U.S. What we know is simply that none of them (including the top dog, Alfred Marshall) championed the adoption of a law-based competition policy during the three decades (1890-1920) of most intense antitrust debates in the U.S. The position of three prominent British economists will be examined in this paper: H.S. Foxwell, D.H. MacGregor, and, of course, Alfred Marshall – the latter in two moments at the extremes of our period, 1890 and 1919. It will turn out that they all shared with their American colleagues a theoretical and operational skepticism about the government and judiciary interference with the free working of markets. They also believed that British industrial structure and business habits were so different from those in the U.S. that the urge of interfering with markets in order to preserve competition was much weaker. Among the paper’s insights is that Marshall’s key concept of “defending a competitor’s right to compete” foreran the modern characterization of the goal of competition policy as “the protection of the competitive process”. Yet Marshall developed his concept without making recourse to the post-1930s neoclassical notion of competition as a static market structure which lies at the foundation of most contemporary antitrust policy: a useful lesson from the history of economic thought for those IO economists who still claim that the classical dynamic view of competition is unsuited as a foundation for an effective competition policy.

Review by Chris Colvin

I will be teaching industrial organisation (IO) to undergraduates next year. It is a brand new course, and so I have been trawling though the websites of IO teachers around the world for inspiration. Overall, I have been quite perplexed with what I have found: undergraduates seem to be fed material that is very theoretical and computational, with little or no context or application. Perhaps this prepares students well for graduate programmes in economics, but the vast majority of economics undergraduates aren’t going to be doing a PhD. And even those that do will require exposure to some empirical research.

I want my students to use their microeconomics, to get them to appreciate that real life is dirtier than in the models. And I want them to understand that economic ideas aren’t fixed in time and space, that a log-run perspective can yield interesting insights about human behaviour. I plan to do so by limiting the use of textbooks and instead delving into academic papers and antitrust cases. I feel economic history should play centre stage in an economics degree, not relegated to an obscure field study. So, when teaching sunk costs and market structure, I will look at the decline of Europe’s film industry in the early twentieth century; when covering collusion, I will set them the US sugar cartel of the 1930s; when teaching natural monopolies, I will examine Victorian railways; and when looking at the efficacy of patents, I will do nineteenth century alternatives.

I am also keen to find something accessible that students can use to appreciate the origins and evolution of competition policy – including why it differs by place, and how legal decisions based on economic arguments made long ago still have resonance today. I want to teach them some history of economic thought. One paper that I hope to discuss in this context is Nicola Giocoli‘s working paper distributed by NEP-HIS on 2012-06-13. Giocoli looks at the reaction in the UK to the advent of antitrust in the US. He finds that influential British economists like Foxwell, McGregor and Marshall were dead against US-style anti-monopoly legislation. They believed it would be difficult to implement, run counter to the ideals of a free market, and be inappropriate in the UK industrial context. The UK had to wait until the 1970s for a pukka competition policy to be introduced.

Alfred Marshall, whose ideas about antitrust policy are explored by Nicola Giocoli

What is particularly interesting about Giocoli’s paper is his description of a transformation in what economists thought competition entailed. For classical economist, competition was about firm conduct; they adopted a dynamic process-based view of competition. For the neoclassical economists that followed, competition was more about market structure, the market condition; this static view was more concerned with business size and the number of competitors. For someone teaching modern IO theory, this is fascinating. Over the last two (or three) decades, IO has seen a paradigm shift from the old structure-conduct-performance view of competition – which primarily concerned itself with measuring market structure – to the so-called New Industrial Organisation view – which, apparently much like the economists described by Giocoli, is far more concerned with figuring out firm conduct and doesn’t necessarily draw a causal link between structure and performance. In short, it appears we have come full circle.

I like Giocoli’s paper because he tries to marry his history of economic thought with up-to-date research in economic history. Instead of seeing the US as a success and Britain as a failure – a view that business historian Alfred Chandler made a living out of – Giocoli argues instead that competition law was unnecessary because Britain was largely still a success, still ahead of everyone else terms of total factor productivity – it didn’t require government intervention. I would encourage Giocoli to further develop this argument by looking at some of the work of Leslie Hannah, whose career has been devoted to debunking Chandler. His work (including in the JEH) shows that the Chandlerian corporation was actually far more a thing of Europe than America. A monopolist like Standard Oil – the company whose breakup is central to any history of antitrust – was the exception rather than the rule. US capitalism is a story of small family-run enterprise, not big business. How does this revision of the business history affect Giocoli’s argument?