The Trustbuster’s Fatal Conceit

After more than a yearlong investigation into America’s largest tech companies, Reps. Jerrold Nadler (D-N.Y.) and David Cicilline (D-R.I.) finally released the long-awaited House Judiciary’s Majority Staff Report on antitrust. Not surprisingly, the report calls for substantial new oversight and stringent antitrust enforcement by both the Department of Justice and the Federal Trade Commission. While offering few new empirical demonstrations of economic harm, it calls for remaking the nation’s antitrust laws out of whole cloth. This includes abandoning the current consumer welfare standard in favor of sweeping new mandates, from structural separation to a revival of the essential facilities doctrine. Indeed, it appears that the committee has dusted off the industrial policy playbook abandoned years ago to reassert the government’s power over markets.

Just how far does the committee report go in revamping the antitrust laws? In short, it ticks every box on a regulator’s wish list. The report outlines a host of draconian mandates, including new rules on nondiscrimination and self-preferencing, new interoperability requirements, and a presumptive prohibition against future mergers by dominant platforms. It also includes other recommendations that are more ambiguous but just as expansive, such as a return to the anti-monopoly crusade spawned by the Sherman and Clayton Acts, which created the original framework for antitrust enforcement (over the objections of most economists at the time). The committee’s renewed antitrust zeal includes new protections for “nascent competitors” as well as prohibitions on monopoly leveraging and other practices considered anticompetitive.

All of this is coupled with an oversized federal presence for enforcement, from greater congressional oversight to enhancing the powers of both the Department of Justice and the Federal Trade Commission through expanded budgets, more onerous reporting requirements, and an invigorated use of merger retrospectives.

Perhaps the most telling point in the proposed antitrust overhaul is the effort to topple the consumer welfare standard as the foundation for antitrust policy. Rather than protecting individual firms, the consumer welfare standard focuses enforcement on promoting efficient market outcomes. For consumers, this is measured by lower prices, more innovation, and more choices in the marketplace. The consumer welfare standard emerged more than 40 years ago and its emphasis on economic efficiency and competition rationalized antitrust policy. This replaced decades worth of antitrust enforcement that was often arbitrary and contradictory, generating less than optimal outcomes and prohibiting practices that were actually innovative and efficient.

To the consternation of politicians, demonstrating that today’s big tech platforms inflict economic harms that require enforcement action proves challenging under the consumer welfare standard. Consumers enjoy many products for free, innovation remains high, and consumer choice continues to expand. The continued development of the Internet of Things and new 5G technologies promise even greater consumer benefits—hardly a smoking gun for inefficient monopolies in need of regulation.

The fervor of today’s antitrust populism is nothing new; recurring waves of such sentiment date back to at least the original era of trustbusting. Yet the intrusive market interventions historically endorsed by antitrust firebrands have yielded questionable results in the marketplace. Going back to the early trustbusters, it is not even evident that the policies they pursued were aimed at helping consumers. In fact, economists such as Tom DiLorenzo have found that output was increasing and prices were falling in the major industries targeted by antitrust regulators. Moreover, these larger firms were innovating in ways that enhanced economic efficiency and benefited consumers.

In fact, the evidence suggests that John Sherman, father of the Sherman Antitrust Act, had little interest in protecting consumers or promoting economic efficiency. Werner Troesken, an economic historian, examined Sherman’s correspondence during the debate over antitrust and found “in light of his letters, and the other historical sources considered here, his actions are inconsistent with the idea that he wanted to promote competition and lower prices.” Rather, Sherman acted to protect the particular interests of a group of smaller, inefficient businesses that were having a difficult time adapting to dynamic and innovative changes in the marketplace.

Nonetheless, the House majority report views this type of government intervention as the epitome of antitrust policy, jettisoning the consumer welfare standard for the political power to protect specific competitors and shape markets as Congress deems fit. In this world, consumer welfare is ancillary to the political preferences of antitrust enforcers, a result drawn out in the work of economist Bob Tollison. His initial research examined antitrust enforcement in the era prior to the rise of the consumer welfare standard and found no correlation between enforcement activity and efforts to mitigate the welfare losses of monopoly. Indeed, his later research found congressional influence to be a better predictor of enforcement activity by federal regulators.

The House antitrust report typifies a fatal conceit highlighted by Nobel Prize-winning economist Friedrich Hayek. While legislators and regulators in Washington, D.C., presume they can design the ideal market, they lack the information necessary to do so. Policies designed and imposed on markets by regulators cannot grasp the vast and dispersed knowledge that underlies a dynamic market. Consequently, Hayek cautioned against such industrial planning: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” The unintended consequences of excessive market interventions can hamper rather than promote innovation and economic activity.

Not only does more aggressive and political antitrust enforcement open the door to harmful policies from the perspective of consumers, but it also places regulators at the hub of economic decision making. Permissionless innovation is clearly threatened by a shift towards a “mother may I” approach of requisite regulatory approval. Instead of competing to better serve consumers, firms will now have to defend themselves in front of regulators who will determine whether their actions unfairly affect other competitors. Other countries have tried this approach—indeed, it is the hallmark of European industrial policy—where protecting favored competitors can be more important than consumer welfare.

This has generated billion-dollar judgments against the major American tech companies as the EU seeks to shelter European companies from more efficient foreign rivals. But it may also be a reason why the innovative Big Tech platforms emerged and thrived in the United States rather than Europe. Abandoning the consumer welfare standard increases the role of the administrative state, creates greater incentives for rent-seeking and unproductive behavior, and imposes real costs on consumers.

This highlights a major flaw in the “big is bad” approach to antitrust. Namely, the big tech platforms accused of monopolizing markets actually may be large because they are efficient, and they offer consumers what they want on terms that consumers like. Several studies have demonstrated that larger firms can be more efficient and more innovative. Economist Harold Demsetz, for example, found that efficiency rather than market power was a better predictor as to why large firms were more profitable than smaller firms. Absent measures of consumer harm, plans to regulate the tech sector threaten some of America’s most efficient and innovative companies with little evidence to suggest that antitrust enforcers can generate a superior outcome.

Sadly, the Republicans’ response to the majority report cedes far too much ground to the Democratic reformers. While falling short of endorsing such recommendations as breaking up companies or prohibiting mergers and acquisitions, the Republican response potentially opens the door for weakening the current consumer welfare standard in favor of more discretionary antitrust enforcement. This position is not surprising; a looser standard for antitrust enforcement would enable enforcement actions against Big Tech for a litany of alleged abuses compiled by Republicans that have nothing to do with economic efficiency or monopolistic practices. These include issues such as an alleged content moderation bias against conservative views and weak privacy protections.

But antitrust policy cannot be used to cure all social ills, nor was it ever meant to. Trying to shoehorn every policy concern and every outcome into a question of antitrust does far more harm than good. Other laws have been passed to address such issues, and if they are found lacking Congress has the prerogative to revisit them or create new laws. But it is not the role of antitrust enforcement to address such wide-ranging concerns.  

It is also worth noting that to avoid being cast as naysayers unwilling to address the problem, many Republicans respond with a common refrain calling for additional funding for the antitrust enforcement agencies. A major antitrust overhaul is not required, the argument goes; just provide the enforcement agencies with the resources they need to do their job. Yet this assumes that these enforcers are generating efficient results. If, in fact, these agencies are impeding legitimate economic activity and innovation, then additional resources will only amplify the scope of these harms while doing nothing to address the efficiencies or inefficiencies of current antitrust policy. A case in point may be the Department of Justice’s recently announced investigation of Google for allegedly using anticompetitive practices to protect its dominance in search.

The majority report’s call for a major rework of our nation’s antitrust policies will ultimately create a larger regulatory infrastructure that will hamper innovation and reduce consumer welfare on many levels. By abandoning the consumer welfare standard, this report wants to upend legal precedent and start anew with sweeping new policies for enforcement activities by federal regulators. Less competitive markets will yield higher prices and less efficiency, and investment in new technologies will be more challenging given new regulatory risks that must be incorporated in investment decisions. Startups may find funding more difficult in this environment.

Finally, it is important to remember that while tech is today’s poster child for antitrust reform, the proposed antitrust overhaul will reach far beyond the technology sector. All American companies will be forced to play by the new rules and the stifling effects of stricter enforcement will affect the entire U.S. economy. The House majority report demonstrates a clear preference for regulation over markets. Yet history suggests there are real limitations to this approach. Perhaps it is best to heed Hayek’s warnings before attempting to redesign some of the most innovative and dynamic markets in the world.

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