EDMUND BURKEAs improbable as it seems from our vantage point today, antitrust was a major topic of debate during the presidential election of 1912. All four candidates – William Howard Taft, the incumbent Republican president; Theodore Roosevelt, the former president and Progressive Party candidate; Woodrow Wilson, governor of New Jersey and the Democratic candidate; and labor leader Eugene Debs, the Socialist Party’s candidate – agreed that something had to be done to curb big business. But they differed about what to do.
It was the Gilded Era of plutocrats and giant trusts that devoured or combined with other firms. The United States Steel Corporation, for example, had swallowed no less than 228 separate companies. Wilson, who was advised by Boston lawyer Louis D. Brandeis, thought behemoth corporations sapped the verve and élan of the nation. Every time an independent firm was acquired by a conglomerate, someone who was previously chief executive officer and captain of a ship became a mere member of the crew in a corporate bureaucracy. Wilson wanted to invigorate antitrust and restrain mergers and acquisitions.
Teddy Roosevelt was also advised by a progressive intellectual – in his case, Herbert Croly, a founder of the New Republic magazine. Roosevelt agreed that giant corporations and the enormous wealth they generated for the men who controlled them endangered the nation. But Roosevelt believed that giant corporations were inevitable in the industrial age. The nation needed big companies to do big things. Rather than stopping businesses from becoming big, Roosevelt wanted to regulate them to ensure that their power was not misused. He argued that the national government needed to be strong enough to keep big businesses on a leash. He criticized Wilson for being afraid of power – corporate or governmental.
Wilson argued that controlling big business through government regulation was a pipedream. Rather than permitting the government to control them, big businesses would control the government. “Don’t you see that [giant corporations] must capture the government, in order not to be restrained too much by it?” Wilson asked.
Wilson won the election, and two years later Congress enacted the Clayton and Federal Trade Commission Acts.
Over the next half century, the struggle between big business and those seeking to keep it in check ebbed and flowed. In the 1970s and 1980s, however, big business gained the upper hand. Its most potent weapon was ideological: it persuaded the antitrust fraternity – lawyers and economists in the regulatory agencies, Congress, courts, and universities – that antitrust should be exclusively concerned with consumer welfare. If two firms want to merge, economists predict whether the new entity will have enough market power to reduce total industry output and increase prices (which are two sides of the same coin). If the answer is yes, the merger should be prohibited; if the answer is no, the merger should be allowed. The social and political consequences of mergers are deemed too subjective to be taken into account.
We now find ourselves in a new Gilded Age. There is much concern about plutocracy, but we also need to also pay attention to the social and political consequences of mergers and acquisitions. During the past decade, for example, Monsanto purchased more than 30 companies, Oracle acquired more than 60 companies, and Google purchased more than 120 companies. In less than a decade beginning in the mid-1990s, more than 80 aerospace-defense firms merged into four dominant firms. Until relatively recently, there were a rich diversity of major book publishers in the United States. Now five conglomerates publish roughly two-thirds of all books in the country, and just one firm, Amazon, sells nearly more than 40% of all books in the country and 67% of all e-books.
Why should we care?
First, corporate size correlates with political power, and corporate giants use their political muscle to obtain all manner of government favors and subsidies. Social scientists call this rent-seeking; liberals call it corporate welfare; conservatives call it crony capitalism. But no matter what we call it, we are talking about a corporate parasitism that sucks blood from the nation and its taxpayers. When in 2003, for example, Congress included prescription drugs in the Medicare program, the big pharmaceutical companies successfully lobbied to prohibit Medicare from negotiating prices. Instead, Medicare must pay manufacturers 106% of what drug makers claim to be their average wholesale price. This costs American taxpayers tens of billions of dollars per year. According to one study, the annual cost of corporate welfare is equal to the total salaries earned in a two-week period by every worker in the country. Most of those benefits flow to the five hundred largest companies.
Second, mergers and acquisitions suppress research and development. Steve Jobs is reported to have said that every merger represents a failure of innovation. Rather than investing aggressively in research themselves, large corporations find it more efficient to buy smaller companies that create new products or processes.
Third, mergers and acquisitions damage local communities. When one company acquires another, it typically closes that firm’s headquarters and consolidates executive functions in its own headquarters. But executives are often leaders in civic institutions, and the home of the acquired firm loses not merely jobs but community leadership and philanthropy. One study found that the presence of corporate headquarters is associated with elite nonprofit cultural institutions in a community. Another study found that companies that are headquartered in a community contribute more to local charities than do comparable businesses headquartered elsewhere.
Fourth, there are too many false positives in merger analyses – that is, the predicted net benefits for consumers often are not realized. The real driving force behind many mergers is increased compensation and prestige for top executives. Even when a merger proposal is supported by elaborate analyses, predicted future “synergies” and “efficiencies” may be camouflage for what really matters: the personal interests of top executives.
Fifth and perhaps most important, citizens are better off with more, smaller companies than with fewer, larger firms. Citizens are not merely consumers. They are also workers who benefit from a diversity of employers. The British advertising company WPP, for example, has merged with or acquired more than 300 previously independent agencies, including venerable American firms such as J. Walter Thompson and Young & Rubicam. It used to be that someone who was unhappy at one firm could look elsewhere. But with fewer firms, personal freedom is diminished. An unhappy executive at WPP 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.”
The debate between Wilson and Teddy Roosevelt was settled by the banking crisis of 2008. There were two roots of the crisis: a long period of aggressive bank mergers, and a successful lobbying campaign by big banks to repeal the Glass-Steagall Act, which had protected the nation since the Great Depression. The repeal allowed financial institutions to both engage in commercial banking with taxpayer-insured accounts and to invest in high-risk instruments such as subprime mortgages and derivatives. The aftermath of the crisis, however, is most telling. Why, in light of what we learned, did we not break up the big banks? Even Alan Greenspan, who previously favored deregulating the banks, concluded after the crisis that the big banks should be disaggregated. “If they are too big to fail, they are too big,” Greenspan said. Wilson and Brandeis would tell us we haven’t broken up the big financial institutions because their political power made that impossible.
Since the founding of the Republic, Americans have understood the dangers of consolidated power. Constitutional law is a key tool for limiting consolidated governmental power. Antitrust law was originally intended as a key tool for limiting consolidated commercial power. That is how it should be interpreted.
-
This piece was written for the Los Angeles Daily Journal. It is adapted from my forthcoming article “The New Road to Serfdom: The Curse of Bigness and the Failure of the Antitrust,” which will be published by The University of Michigan Journal of Law Reform. A preliminary version of that article is available here.