University of Chicago Law SchoolChicago Unbound

Occasional Papers Law School Publications

1983

The Economists and the Problem of MonopolyGeorge J. Stigler

Follow this and additional works at: http://chicagounbound.uchicago.edu/occasional_papers

Part of the Law Commons

This Working Paper is brought to you for free and open access by the Law School Publications at Chicago Unbound. It has been accepted for inclusionin Occasional Papers by an authorized administrator of Chicago Unbound. For more information, please contact unbound@law.uchicago.edu.

Recommended CitationGeorge J. Stigler, "The Economists and the Problem of Monopoly," University of Chicago Law Occasional Paper, No. 19 (1983).

OCCASIONAL PAPERS

FROM THE LAW SCHOOL

THE UNIVERSITY OF CHICAGO

NO. 19

1982

Occhsional PapersfromThe Law SchoolThe University of Chicago

Number 19

The Economists and theProblem of MonopolyGeorge J. Stigler

Occasional PapersfromThe Law SchoolThe University of Chicago

Number 19

The Economists and theProblem of MonopolyGeorge J. Stigler

George J. Stigler, who received the 1982 Nobel Prizein Economics, has been associated with the faculty ofthe Law School for many years. With members of theLaw School's faculty, he has played a central role inbringing the insights of economics to legal analysis.The Law School has greatly benefited from its longrelationship with Mr. Stigler, and is pleased to reprintthe following essay.

Mr. Stigler is the Charles R. Walgreen Distin-guished Service Professor Emeritus in the Depart-ment of Economics and the Graduate School of Busi-ness at the University of Chicago. He is also directorof the Center for the Study of the Economy and theState and the editor of the Journal of PoliticalEconomy.

Copies of Occasional Papers from the Law School areavailable from William S. Hein & Company, Inc.,1285 Main Street, Buffalo, New York 14209, to whominquiries should be addressed. Current numbers arealso available on subscription from William S. Hein &Company, Inc.

2

The conomists and theProblem of Monopoly*George J. Stigler

For much too long a time, students of the history ofthe American antitrust policy have been at leastmildly perplexed by the coolness with which Ameri-can economists greeted the Sherman Act. Was not thenineteenth century the period in which the benevolenteffects of competition were most widely extolled?Should not a profession praise a Congress which seeksto legislate its textbook assumptions into universalpractice? And with even modest foresight, should notthe economists have seen that the Sherman Act wouldput more into economists' purses than perhaps anyother law ever passed?

Of course there were partial explanations. The cool-ness of the economists sometimes rested more on dis-belief in the efficacy of the Sherman Act than onhostility to its purpose, The route of regulation waspreferred-although this preference hardly restoresthe reputations of those economists as prophets. Onemight even point out that there were not many goodAmerican economists at the time, although an un-deniable giant such as Irving Fisher shared the com-mon view.

I intend on this occasion to review the attitudes ofeconomists toward monopoly as a problem in publicpolicy. My subject, however, is a good deal broaderthan the Sherman Act and its reception: the last twocenturies of the economic writings on monopoly pol.icy, particularly in England and the United States,will be surveyed. Thereafter I shall examine the re-ciprocal effects of economics and antitrust policyupon each other.

1. From Smith to ShermanAdam Smith, that great manufacturer of traditions,did not fail us in the area of monopoly, for he createdor rendered authoritative three traditions that werefaithfully followed in English economics for almostone hundred years. The first tradition was to pay no

* This essay was delivered as the Ely Lecture before the AmericanEconomic Association in Washington, D.C., December 28, 1981, andappeared in the American Economic Review, May 1982. It is re-printed with permission. @Copyright, 1982, American Economic As-sociation.

The author wishes to thank Aaron Director and Stephen Stigler forhelpful comments.

3

attention to the formal theory of monopoly, tradi-tion first challenged in 1850 by Dionysius Laodner indealing with railway rates.' How fortunate wad Smith:even by neglect of a subject he could create a tradi-tion! It is the one area where many of us, however, arehis equal or superior.

The second tradition was to identify the seriousmonopolies of his time with the grants of exclusivepower by the state. For Smith the two leading in-stances were the guild corporations and the great jointstock trading companies.' He could not have been un-mindful of the existence of many other examples-onewould be the highland village which could supportonly one or two enterprises in one trade. But almostby definition they were of small importance: economic,mosquitos collecting their drop of blood from the bodyeconomic.'

His third tradition-setting view was that nothingcould be done about the instances of monopoly andcollusion of small numbers of rivals. Actual prohibi-tion of collusive meetings could not be achieved by"any law which either could be executed, or would beconsistent with liberty and justice."' Those meetingsof businessmen which he made famous would seldomcreate "merriment," of course, if they left profitswhere they found them.

I shall be brief in dealing with the later bearers ofthese traditions. Let me only notice in passing thatRicardo called a price a monopoly price only if cost ofproduction had no influence on its level,'-an ade-quate proof of the low state of monopoly theory. Hewould demand, however, that I record the statementattributed to him by Hansard: "Mr. Ricardo. . . [had] never given a vote in favor of monopoly inhis life."'

John Stuart Mill recognized the baneful effect ofsmall numbers on the vigor of competition: "Wherecompetitors are so few, they always end up agreeing

'Railway Economy (New York: Harper and Bros., 1850), ch. XIII.'The Wealth of Nations Glasgow ed. 1976 (Oxford: Clarendon

Press, 1976) passages on apprenticeship and joint stock companies.'The only large markets in which Smith expected important econo-

mies of scale, and hence small numbers, were banking, insurance,canals, and waterworks (ibid., II, 281).

'Ibid., 1, 144.'PHnciples o/ Political Economy and Taxation (Cambridge: Cam.

bridge University Press, 1951) pp. 249-50; also Works and Cor-respondence (Cambridge: Cambridge University Press, 1951-55), II,260, IX, 97-98. In extenuation, he should be credited with an earlyrecognition of Mr. Harberger's triangle, II, 409.

Ibid., V, 301.

4

not to c mpete."' In such industries as water supply,therefor , although the state must control entry toprevent taste, it must also sooner or later regulateand possibly operate such enterprises. In keeping withcustom, Mill saw no way for the state to support com-petition other than by failing to create monopolies.

We have one early antimonopoly policy on which totest the attitudes of the classical economists. A host ofearlier laws were codified into the Combination Actsof 1799 and 1800, which forbade either employers oremployees to join to influence the wage bargain. Thepassage of those acts did not attract the attention ofany economists (who were few indeed in those years)but their repeal in 1824, which was engineered byFrancis Place, did receive modest attention.' ThatMcCulloch wrote strongly in support of the repeal ofthe acts is a plain expression of the remoteness fromthe economists' thoughts of an active antimonopolyprogram.' This well-informed writer ("We shouldnever have done were we to attempt to lay before ourreaders a tithe of the information of which we arepossessed"), in the course of a discussion marvelousfor its insights as well as its inconsistencies, remarks,

The merest tyro in economical science would nothesitate to ridicule all apprehension of famine, oreven of a stinted supply of the market, from acombination of corn dealers, or of bakers, to raisethe price of corn or bread: For we would feelassured, that there were a hundred chances to onethat no such combination would ever be generallyentered into; and that supposing it were, themoment prices had been raised ever so littleabove their natural rate, it would become theinterest of a large body of combiners to secedefrom the combination, and to throw their stockson the market."

'Principles of Political Economy (Toronto: University of TorontoPress, 1965), 1, 142.

'A comprehensive survey is made by William D. Grampp in "TheEconomists and the Combination Laws," Quarterly .Journal of Eco-nomics, November 1979: see also the famous discussion by A. V.Dicey, in Law and Opinion in the Nineteenth Century (London: Mac.millan, 1905). The effects of the early acts on unions deserve study.Grampp finds the laws "unworkable" and failing to prevent combina-tions from forming, but also quotes with approval the view that therepeal was "the starting point of a great new development in the his-tory of English trade-unionism" (op. cit., pp. 515, 522).

"'Draft of proposed Bill . . . Relating to Combinations of Work-men, etc.," Edinburgh Review 39 no. 77 (January 1824).

"Ibid., pp. 320-21.

5

The weakness of collusion continued to be 0 widelyaccepted belief of economists.

The views of the community at large, a4 well asthose of economists, are well-expressed in the ad.mirable article on monopoly in the Penny Cyclopedia(1839). I quote two passages.

It seems then that the word monopoly was neverused in English law, except when there was aroyal grant authorizing some one or more personsonly to deal in or sell a certain commodity orarticle.

If a number of individuals were to unite for thepurpose of producing any particular article orcommodity, and if they should succeed in sellingsuch article very extensively, and almost solely,such individuals in popular language would besaid to have a monopoly. Now, as theseindividuals have no advantages given them bythe law over other persons, it is clear they canonly sell more of their commodity than otherpersons by producing the commodity cheaper andbetter. (15:341.)

On this view, laissez-faire served the ends of an anti.trust policy.

The omission of a thory of monopoly and oligopolybegan to be remedied in the last third of the century.The remarkable work of Cournot and Dupuit began toenter English economics, in particular throughEdgeworth, Sidgwick, and Marshall." Putting asidethe intractable problem of oligopoly, substantial ad-vances were made in the theory of monopoly and pricediscrimination. So ended the first Smith tradition.

The second tradition-that all importantmonopolies were created by the state-began to beeroded in the nineteenth century with the develop-ment of railroads and other large.scale utilities, asMill's practice has already told us. We now had aclass of monopolies which might, and usually did, getgrants of power (eminent domain) and more merchan-disable assets from the state, but whose existencerested chiefly on important economies of scale. Therecommendation, first of publicity of accounts, andthen regulation or public ownership, became general.

"I am coming to admire Henry Sidgwick almost as much as theother two. His Principles of Political Economy (1883; 3d ed., London:Macmillan, 1901) has two chapters (bk. II, ch. IX and X) which areamong the beat in the history of microeconomics, dealing with thetheories of human capital and noncompetitive behavior.

6

By 18901 Britain and the United States were the onlyimporta t nations in the world with privately ownedrailroad. Before that date little attention was paid inthe English or American economics to monopoly inthe manufacturing or trading sectors. So Smith's sec-ond tradition had bifurcated into state-createdmonopolies and those created by economies of scale,and the latter constituted the public utility sector ofthe period.

Smith's third tradition, that the state should onlyrefrain from creating monopolies, was thus amendedto assign responsibility to the state also for the controland perhaps operation of railroads and similar utili-ties. A careful student of the history of economicswould have searched long and hard, on the un-seasonably cool day of July 2 of 1890, the day theSherman Act was signed by President Harrison, forany economist who had ever recommended the policyof actively combatting collusion or monopolization inthe economy at large.

2. Since ShermanThe historians of American antitrust policy haveemphasized the lack of enthusiasm, and often thedownright hostility, with which economists greetedthe Sherman Act. 2 Jeremiah W. Jenks, author of astandard work, The Trust Problem, offered this ap-praisal a decade after the passage of the law:

Twenty-seven States and Territories havepassed laws intended to destroy such industrialcombinations as now exist, and to prevent theformation of others. Fifteen States have similarprovisions in their constitutions, . . . Besides thislegislation on the part of our States, we have aFederal Anti-Trust Act. . . . A study of thesestatutes and of the decisions of our courts of lastresort which have been made under them, willshow that they have had comparatively little,practically no effect, as regards the trend of ourindustrial development.'

"See H. Thorelli, Federal Antitrust Policy (Baltimore: JohnsHopkins University Press, 1955), pp. 311 ff.; John D. Clark, The Fed.eral Trust Policy (Baltimore: Johns Hopkins University Press, 1931),ch. V.

"The Trust Problem (New York: McClure, Phillips, 1900), pp.217-18. Richard T. Ely was no less emphatic: "If there is any seriousstudent of our economic life who believes that anything substantialhas been gained by all the laws passed against trusts.. . . this author-ity has yet to be heard from" (Monopolies and Trusts (New York:Macmillan, 19061, p. 243).

7

This scepticism was shared by probably a mnjority ofeconomists of the period, in England as we as here.Thus, D. H. Macgregor, Marshall's premier Btdent ofmarket organization, observed that leading econo-mists believed that the development of large-scale en-terprise represented a powerful historical force:

If this is so, the State places itself in an altogetheruntenable position by the enactment of lawsagainst combinations as such-laws, for instance,so general in their terms as the Sherman Act of1890. . . . If there are economic tendencies, theState cannot prevent, although it can harassthem; and the belief of economists in thepossibilities of combination appears justified bythe utter failure of the American laws to stop thedevelopment, although these laws now fill abulky volume. More than this, even if there werea greater divergence of expert opinion than thereis, it would not be the function of the state toprejudge the question, and to set up a standard ofeconomic orthodoxy. The position is anintolerable one when the course of industrialdevelopment stultifies the statute-book,monopolistic associations flourish in the face ofthe law, and anti-Trust proposals have exhaustedtheir function when an electoral campaign isover."

Two influential economists were somewhat moresympathetic to limited antitrust policies. J. B. Clarkbelieved that large enterprises were inevitable, butthat they would be deprived of monopoly power by thethreat of potential entry, provided these great en-terprises were denied the use of predatory policiessuch as local price cutting." Marshall viewed the Fed-eral Trade Commission as primarily a research arm ofpolicy, able to collect facts and submit them to "long-continued, organic and scientific study," and there-fore become competent to distinguish the effects of so-cially desirable and undesirable economic practices."I am not prepared to ridicule this vision, and indeedthe commission viewed itself partly in that light in itsfirst days. Nevertheless, it would have been helpful if

"Industrial Combination (London: George Bell, 1906), pp. 231-32."The Control of Trusts (New York: Macmillan, 1901). The role for

legislation is much larger in the second edition, where he asked forprohibitions on interlocking directorates, requirements, and unfairmethods of competition. See J. B. and J. M. Clark, The Control ofTrusts, 2d ed. (New York: Macmillan, 1912), pp. 104 ff., ch. VII.

"Industry and Trade, let ed. (London: Macmillan, 1919), pp.516-18.

8

Marsh ll, or some of his lesser contemporaries, hadexplain the nature and workings of their sovereignregulatry tool, publicity. How and where publicity(after all, a policy akin to legal blackmail) could con.trol undesirabie behavior was never spelled out."

In the decades that immediately followed, it wouldbe more accurate to say that tolerance of antitrust pol-icy grew, than to say that it became a popular causeamong economists. As late as 1932 Arthur R. Burnscharacterized the antitrust laws as "a notable fail-ure,"" but friends of the policy had begun to appear.Henry C. Simons, in his celebrated Positive Programfor Laissez-Faire,' demanded that

There must be outright dismantling of ourgigantic corporations, and persistent prosecutionof producers who organize, by whatever methods,for price maintenance or output limitation. Theremust be explicit and unqualified repudiation ofthe so-called "rule of reason.". . . In short,restraint of trade must be treated as a majorcrime. ...

No doubt my memory exaggerates the influence ofthis voice, which sounded so clear and brave when Ilistened to it in a Chicago classroom.

In any event, I believe that a census of economists'attitudes would show a steady rise in the popularity ofantitrust policy in the 1950s and 1960s. One tellingindication of the present state of professional opinionis that Professor Galbraith, who attacks only popularviews, has repeatedly delighted in disparaging the ef-fectiveness of our antitrust policy, or denying its con-sistency with other policies.

This rapid sketch of the evolution of economists' at-titudes toward antitrust policy poses many questions,of which I shall discuss three with merciful brevity:

1. Why did the economists' attitudes change?2. What effect has economics had on antitrust

policy?3. What effect has antitrust policy had on

economics?

"For an example of the bold claims for publicity, see ArthurHadley, Railroad Transportation (New York: G. P. Putnam's Sons,1893), p. 137.

"*The Decline of Competition (New York: McGraw-Hill, 1932), p.523.

"*Psitive Aogram for Laissez-Faire (University of Chicago Press,1934).

9

3. The Causes for the Change of OpitiioiThe surprise often expressed at the early inoferenceor opposition to antitrust policy by economistsstemmed from the traditional praise of competitiveorganization of markets and industries in our liter-ature. Free trade is a sort of international anti-monopoly program in itself: the markets of our nationshould be open to producers in other nations. So vasta majority of economists had vigorously supportedfree international trade for the century before theSherman Act that it was not a bizarre expectationthat intranational competition should be favored asmuch as international competition. But we know thatthis was not the case, and we shall shortly propose areason for this difference.

It would be gratifying to me if I could report thatour profession's changing view was based upon thesystematic study by economists of the effects of thepolicy, in short, that hard evidence carried the day.Unfortunately, there have been no persuasive studiesof the effects of the Sherman and Clayton Actsthroughout this century. Simon Whitney's two-vol-ume survey reaches a favorable verdict on the anti-trust laws," but his chapter surveys of industries andcases are joined to his conclusions by leaps of Olympicgrandeur. My attempt in 1967 at measurement of theeffects of the antitrust laws was able to dismissnonsense such as the prohibition of interlocking direc-torates, but reached only feebly favorable presump-tions on sections 1 and 2 of the Sherman Act.2" JamesEllert's more recent comprehensive analysis of the in-fluence of antitrust actions on stock prices of defen-dant companies finds only small effects at best, ex-cept when triple damage suits follow."

Indeed, the early scepticism of the effectiveness ofthe laws has even received some recent confirmation.The dissolutions of the American Tobacco Companyand especially of the Standard Oil Company were atthe time widely viewed with scepticism. In a measurethese doubts were recently confirmed when MalcolmBurns showed that the stock market soon set the rele-vant future effects of these dissolutions at naught."

"Antitrust Policies (New York: Twentieth Century Fund, 1956).""The Economic Effects of the Antitrust Laws," Journal of Law

and Economics 9 (1967): 225-58.""Antitrust Enforcement and the Behavior of Stock Prices," Ph.D.

dissertation, University of Chicago, 1975.""The Competititve Effects of Trust*Busting: A Portfolio Analy-

sis," Journal of Political Economy 85(1977): 717-39.

10

There " numerous scraps of evidence on the issue,but they are by no means single-minded in their ten-denciesl so we must look further.

I would propose as a first main explanation for thechange of opinion a simple, and yet I believe an im-portant, point. In the first decades of the ShermanAct, all-literally all-the attention of economistsand public was focused on combination and explicitcooperative arrangements (now labeled cartels) withmonopoly power. Everyone knew that the first sectionof the Sherman Act concerned collusion, and the Ad-dyston Pipe case was duly observed, but informal col-lusion seemed a peripheral target of the law. J. B.Clark was explicit:

So long as mere pools or contracts to controlprices were depended on they were not asmenacing as the later forms of union [of firms]became; and they did at least allay a warfare thatinvolved much evil. In doing this they made theircontribution to general prosperity, and themodest price of this was something to which thepublic reconciled itself, though it did not makethe payment altogether willingly. It was theappearance of consolidations that were firmerand more complete that caused the menacingshadow of general monopoly to deepen.2'

The Sherman law was primarily a law against trusts.The Clayton Act did not even concern itself with con-spiracies, with the exception of the prohibition of in-terlocking directorates.

Gradually the emphasis of the enforcement of thelaws shifted toward the conspiracies in restraint oftrade. In historical retrospect there have been manyconspiracy cases for every attempt to prevent or dis-solve a monopoly. That shift in focus had an impor-tant consequence for professional opinion.

Collusion cases do not raise the question of econo-mies of scale, at least in any easy or explicit way. Allthe fears that dissolution of large firms would lead togreat inefficiencies seem to fall by the side in collusioncases. The defender of antitrust policy as it was prac-ticed need not offer defences against a charge of eco-nomic inefficiency or obstruction of great historicalforces. As the main content of the effective definitionof monopoly changed, it became easier to opposemonopoly.

There is and was no tradition of affection for cartel

"Clark and Clark, The Control of Trusts (1912), p. 4.

11

organizations in the Anglo-Saxon literature:1 indeedthe words cartel and guild are frequently d toanathematize an industry or practice. Standkrd the-ory associates cartels with less efficient uses of re-sources than with monopoly proper, and with muchless technological progress. Cartels belong in the clawsof indefensible institutions, and it would more appro-priately express American economists' attitudes ifcartellizing had been labelled industrial incest.

Let me consider more briefly a second possible ex-planation for the growth of professional liking for anti-trust policy, in addition to the shift in policy emphasisto collusion that I have just described. The mainmethods of controlling economic activity alternativeto the market are public regulation and ownership. Itwould be very easy to say that growing disenchant-ment with political controls of economic activity hasincreased the desire of economists for market solu-tions. The reputations of the NRA, incomes policies,and general price controls-to say nothing of the poetoffice-are not of the best. The reputation of industryregulation of transportation and agriculture is no bet-ter. Yet I am unwilling to press this case: for everycriticism of the failures of political controls, I suspectthat I can still find two or three allegations of marketfailure.

Finally, let me propose one further explanation, onethat economists are very good at understanding. Aftermany years of abstention, I have recently been a par-ticipant in several antitrust cases. From these cases Ihave learned three things:

1. It was not exactly news, but it was impressedupon me that justice does not always prevail,and it is fortunate that Justice does not alwaysprevail.

2. The number of economists, ranging from Nobelprize winners to graduate students no .betterknown than the Unknown Soldier, who are em-ployed in antitrust actions is large, running intothe many hundreds.

3. The rate of compensation for economists in thisactivity is not in violation of the federal min-imum wage law.

I simply record that antitrust testimony is probablyone of the three or four major sources of income ofeconomists, well below teaching and research but pos-sibly equal to that earned from writing, lecturing, andtelevising the mother science, or from making macro-economic predictions.

If you are unsatisfied with the adequacy of these

12

explations for the rise in favor among economists ofthe; anlitrust policy, you share that feeling with me.

4. The Economists' Influence on PolicyWhen a set of recommendations is made at one timeby a prominent economist and soon followed by thepassage of laws consistent with those recommend.ations, it is possible to believe that the recommend-ations were being followed. This sequence can be ob-served with respect to J. B. Clark's detailed pro-nouncements against predatory competition and theantitrust laws of 1914.

Yet I am unwilling to believe that economists ingeneral, or Professor Clark in particular, had any ap-preciable influence on antitrust legislation. It wouldbe possible to mention many other people who weremaking similar recommendations, but that merelycomplicates the chain of causation. The real reasonfor doubt is that no economist had any professionalknowledge on which to base recommendations thatshould carry weight with a sceptical legislator. Con-sider two important examples. First, the major role ofpredatory competition in obstructing and suppressingthe competitors of a trust was based upon anecdotalhearsay, primarily of the muckrakers. Here is a sam-ple from J. B. Clark:

A producer. . .once called on the manager ofthe trust that was driving him to the wall, andwas received with the brusque admonition thathe had "better get out of the business." "But doyou not see," said the independent producer,"that, in my territory, I can produce morecheaply than you can?" "Do you not see," wasthe reply, "that if we lose money in the twentycities where you are operating, and make moneyin the two hundred other cities where we areoperating, we come out ahead?""

Candor forces me to state my belief that the distin-guished Columbia professor invented this dialogue,but even if he had a recording of it, it is no evidencefor an economist. Modem scholarship, I may observe,has raised strong doubts about the frequency of use ofpredatory competition, and has by no means resolvedthe theory of its operations."

"Ibid., pp. 34-35."John S. McGee, "Predatory Price Cutting: The Standard Oil

(N.J.) Case," Journal of Law and Economics 1 (1968); L. G. Telsor,"Cutthroat Competition and the Long Purse," Journal of Law andEconomics (1966); and for references to the substantial literature, J.S. McGee, "Predatory Competition Revisited," Journal of Law andEconomics 23 (1980).

13

Second, the view that the watering of stock d thefleecing of investors was one main purpose of he for-mation of trusts rested, so far as I can tell, on he factthat some mergers were extremely profitable to pro-moters-with scarely a glance at the effects upon in-vestors. If J. P. Morgan's yacht was a powerful argu-ment, it should still not have come from professors ofeconomics. We shall return again to this problem ofestablished economic knowledge.

The active participation of economists in antitrustpolicy has of course grown immensely. The first econ-omist in the Antitrust Division may have been CorwinEdwards, in the regime of Thurman Arnold." Thenumber of economists has now risen to about forty-five, and the Federal Trade Commission has twice asmany." The commission, indeed, was assigned largetasks of economic research by its enabling statute,and in its first fifteen years the number of economistsrose to forty-four (in 1930),s only to fall by more thanhalf in the next two decades. The wonder, of course, isthat any large number of economist. ever survive in alaw enforcement agency. To these public servants wemust add the number of economists employed byprivate parties, which has been possibly twenty timesas large. But unless one believes in a labor theory ofvalue, the magnitude of economists' influence re-mains uncertain. Even on the labor theory of value,our socially necessary amount of labor is a tiny part ofantitrust product value.

Those who are sceptical of our influence will findsupport in Suzanne Weaver's interviews in the Anti-trust Division, where the tension between economistsand lawyers is emphasized." The powerful resentmentof the lawyers to Donald Turner's economic orienta-tion is well known. A parallel study of the FTC by R.A. Katzmann finds economists achieving a position ofsome power after 1970, which suggests that someone'slearning curve is rather flat." Knowledgeable econo-

"He provides a characteristically noneconomic account of Arnoldin "Thurman Arnold and the Antitrust Laws," Political ScienceQuarterly 58 (1943): 338-55.

"Data for the Antitrust Division of the Department of Justice wereprovided by William Baxter and Bruce R. Snapp. Data for the Fed.eral Trade Commission were provided by John Peterman.

"It is not apparent that these economists had a large influence onthe commission's work; they are studiously ignored by G. C. Hen.derson, The Federal Trade Commission (New Haven: Yale UniversityPress, 1924).

"Decision to Prosecute (Cambridge: MIT Press, 1977), esp. pp.120-36.

"Regulatory Bureaucracy (Cambridge: MIT Press, 1980), ch. IV.

14

miits ve proposed much more favorable verdicts onour nuence, but they do not offer evidence of a spec-ificity power such as we normally require in pro-fesional work."

Economists have their glories, but I do not believethat the body of American antitrust law is one ofthem. I rest my fundamental doubts about our in.fluence on antitrust policy on the fact that we haveprovided precious little tested economic knowledge toguide policy. No one can believe that we have estab-lished a precise relationship between concentrationand market power. Doctrines such as "sharedmonopoly," "preemptive product differentiation,"and price fixing by interviews with the trade presshave all been proposed by economists and antitrustagencies in the past decade. None is even agreed togenerally by economists, let alone tested empirically.The prosecution and defense both find economists totheir liking, but that hardly establishes the directionof causation. Some cases seem sophisticated and sen-sible (e.g., the widely acclaimed Sylvania decision),but shouldn't this happen with random fluctuation?

If law is efficient-as my colleague (now Judge)Richard Posner has argued with great learning and in-genuity-we should expect it to incorporate testedknowledge, and for the rest to respond to the effectivepolitical forces impinging upon policy information. Itwould be remarkably vain to believe that today's in-dustrial organization economics supports much spe-cific policy. I freely grant that our economic analysisis better than J. B. Clark's. I hope Professor Clarkagrees. If we have improved, our influence should besomewhat greater than it once was but that does notmean that it should be large. We need to be humble ina day when the greatest function of the antitrust lawsappears to be to arm the defenses of the corporate of-ficials who, when a takeover proposal is made, seek tomaintain their tenure against the avarice of theirstockholders.

5. The Influence of Monopoly Policyon EconomicsLet us now turn the question around and ask what theeffect of the antitrust policy has been on economists.We are addressing a special case of the general prob-

"See Oliver Williamson's commentary in R. D. Tollison, The Polit-ical Economy of Antitrust (Lexington, Mass.: D. C. Heath, 1979), pp.84-90.

15

lem of how a science responds to the ints of itssociety.

The direct demand for the services of econoits inimplementing antitrust policy-particularly in litiga-tion-has already been referred to. No one has re-pealed the aphorism about pipers and the tunes theyplay: I would conjecture that the influence of directemployment is neither negligible nor large. I suspectthat the large number of economists who are benefi-ciaries of the Bell system (including its journal) areless prone to criticize that system than they wouldotherwise be. Again, antitrust experts surely lose oneor two degrees of freedom in dealing with the effects ofconcentration or the definition of a market in eachantitrust case in which they appear.

Jacob Viner once told me of his experience in testi-fying for the government in an early basing-pointprice system case. I may add that his compensationwas probably negligible or less." He began, he said, asa detached scholar, but after some hours of sharpcross-examination he found that he had become anaggressive supporter of the government's position.Only the economist who withdraws completely fromall policy discussions is insulated from such in-fluences, and insulated also from much of the realworld.

A quantitative measure of our profession's changinginterest in monopoly and public regulation can be de-rived from that customary guide, the Index of Eco-nomic Journals. This source tells us that we fullyshared the excitement of the progressive era and themuckrakers problem of monopoly: fully one-fourth ofall articles in America in the first decade of this cen-tury were on monopoly and public regulation. Fourout of five of these articles were on the panacea of thatage, public regulation of utilities. With the passage oftime the relative interest in monopoly fell in half, andthe interest in public utilities fell by seven-eighths,and now neither subject receives as large a share ofeconomists' attention as in Britain. The absolute levelof writing on these subjects has of course risensubstantially.

I find this relative decline in the measure of our in-terest less surprising, and not at all disturbing, com-pared to the minor influence that our antitrust policyhas had upon fundamental economic research. One

'I am reminded of the time Viner gave a splendid lecture at theUniversity of Minnesota on the balance of power. The lecture bureauasked him for the customary 15 percent of his fee, which he gleefullyreported to be zero.

16

scholaI Aaron Director, did examine a variety of in-dustri 1 practices in the course of teaching a famouscourse on antitrust law with Edward Levi and madefascinating theoretical contributions (virtually alloral) on predatory competition, tie-in sales and otherforms of price discrimination, and patent policy. Buthis work has had few imitators.

Consider the problem of defining a market withinwhich the existence of competition or some form ofmonopoly is to be determined. The typical antitrustcase is an almost impudent exercise in economic ger-rymandering. The plaintiff sets the market, at a max-imum, as one state in area and including onlyaperture-priority SLR cameras selling between $200and $250. This might be called J-Shermanizing themarket, after Senator John Sherman. The defendantwill in turn insist that the market is worldwide, andincludes not only all cameras, but also portrait artistsand possibly transportation media because a visit is asubstitute for a picture. This might also be called T.Shermanizing the market, this time after the Sena-tor's brother, General William Tecumseh Sherman.Depending on who convinces the judge, the concen-tration ratios will be awesome or trivial, with a largeinfluence on his verdict. My lament is that this battleon market definitions, which is fought thousands oftimes what with all the private antitrust suits, has re-ceived virtually no attention from us economists. Ex-cept for a casual flirtation with cross-elasticities of de-mand and supply, the determination of markets hasremained an underdeveloped area of economic re-search at either the theoretical or empirical level.Other branches of antitrust economics, such as ver-tical mergers and franchising and leasing, have beenalmost equally neglected.

It would not be proper to conclude that our anti-trust policy has had no effect upon economic research.A literature such as that on workable competition oradministered prices-neither an ornament to our sci-ence-was created to give advice on monopoly policy.The data supplied to the scholars by litigation haveprovided a wealth of materials, which have yieldedamong other good things innumerable dissertations onas many industries. Industrial organization was amuch more active field in the United States than else-where between the two World Wars, and our antitrustpolicy was surely the main reason for this difference.Yet this history is an unnecessary reminder that ac-tive public policy carries no assurance that fun-

17

damental economic research relevant to that policyarea will flourish.

6. ConclusionThe only conclusion I shall seek to draw from thissurvey of the relationship between economics andantitrust policy is that the attitude of economiststoward monopoly policy is strongly influenced by thecorpus of technical price theory. Our present supportfor procompetitive policies is due in good part to thestrong virtues we attach to competitive markets andincidents.

That point is illustrated rather than contradictedby our historical survey. Competition is now muchmore vigorously supported than it was in 1890 primar-ily because we understand it much better today. In1890 competition was a commonsense notion in eco-nomics, more a loose description of economic behaviorthan an analytical concept. In no sense was the su-premacy of competition challenged by the then small,emerging literature on monopoly. A concept withoutenemies, however, is also a concept without informedfriends. The content and power of competition havebecome much better understood after several gener-ations of far-ranging debate about monopolistic andimperfect competition and oligopoly-a word un-known to the profession in 1890. Consider one smallexample: The earlier literature of predatory competi-tion had the predator cut prices in the vicinity of theprey and raise prices elsewhere to recoup the loss. To-day it would be embarrassing to encounter this argu-ment in professional discourse.

I once encountered a vigorous criticism when Iargued the related thesis that professional economistsare more favorable to the use of a price system thanother academic people." Even the urbanity ofHarvard economists was ruffled at the suggestion thatthey leaned more than intellectuals generally towardmore use of the price system and less use of the politi-cal system in dealing with economic problems. Quiteindependently of the question of how one should lean,I believed then, as I do now, that it is a tribute to thestrength of the corpus of knowledge in a discipline ifits practitioners accept it even in areas outside theirprofessional work. We have trouble enough showinghow economics influences our society, so it is of someconsolation to assert that it influences us!

"See "The Politics of Political Economists," reprinted in my Es-says in the History of Economics (Chicago: University of ChicagoPress, 1965).

18

Retere cesBurns, 4rthur. The Decline of Competition. New York:

McGraw-Hill, 1932.Burns, Malcolm. "The Competitive Effects of Trust-

Busting: A Portfolio Analysis," Journal of PoliticalEconomy 85 (1977):717-39.

Clark, J. B. The Control of Trusts. New York: Mac-millan, 1901., and Clark, J. M. The Control of Trusts. 2d edi-

tion. New York: Macmillan, 1912.Clark, John D. The Federal Trust Policy. Baltimore:

Johns Hopkins University Press, 1931.Dicey, Albert Venn. Law and Opinion in the Nineteenth

Century. London: Macmillan, 1905.Edwards, Corwin. "Thurman Arnold and the Antitrust

Laws." Political Science Quarterly 58 (1943): 338-55.Ellert, James. "Antitrust Enforcement and the Behavior

of Stock Prices." Ph.D. dissertation, University of Chi-cago, 1975.

Ely, Richard T. Monopolies and Trusts. New York: Mac-millan, 1906.

Grampp, William D. "The Economists and the Com-bination Laws." Quarterly Journal of Economics 93(November 1979): 501-22.

Hadley, Arthur. Railroad Transportation. New York: G.P. Putnam's Sons, 1893.

Henderson, G. C. The Federal Trade Commission. NewHaven: Yale University Press, 1924.

Jenks, Jeremiah W. The Trust Problem, New York:McClure, Phillips, 1900.

Katzmann, R. A. Regulatory Bureaucracy. Cambridge:MIT Press, 1980.

Lardner, Dionysius. Railway Economy. New York:Harper and Bros., 1850.

McCulloch, J. R. "Draft of proposed Bill .. .Relating toCombinations of Workmen, etc." Edinburgh Review39, no. 77 (January 1824).

McGee, John S. "Predatory Price Cutting: The StandardOil (N.J.) Case." Journal of Law and Economics 1(October 1958): 137-69.

. "Predatory Competition Revisited." Journal ofLaw and Economics 23 (October 1980).

Macgregor, D. H. Industrial Combination. London:George Bell, 1906.

Marshall, Alfred. Industry and Trade. 1st ed. London:Macmillan, 1919.

Mill, J. S. Principles of Political Economy. Toronto: Uni-versity of Toronto Press, 1965.

19

Ricardo, David. Principles of Political Eco my andTaxation, edited by P. Sraffa. Vol.1 of Worksaand Cor-respondence. Cambridge: Cambridge diversityPress, 1951.

-. Works and Correspondence, edited by P. Sraffaand M. H. Dobbs. 10 vols. Cambridge: CambridgeUniversity Press, 1951-55.

Sidgwick, Henry. Principles of Political Economy. 1883.3d ed. London: Macmillan, 1901.

Simons, Henry C. Positive Program for Laissez-Faire.Chicago: University of Chicago Press, 1934.

Smith, Adam. The Wealth of Nations. Glasgow edition.Oxford: Clarendon Press, 1976.

Stigler, George. "The Economic Effects of the AntitrustLaws." Journal of Law and Economics 9 (October1967):225-58.

-. "The Politics of Political Economists." In Essaysin the History of Economics. Chicago: University ofChicago Press, 1965.

Telser, Lester G. "Cutthroat Competition and the LongPurse," Journal of Law and Economics, 1966.

Thorelli, H. Federal Antitrust Policy. Baltimore: JohnsHopkins University Press, 1955.

Weaver, Suzanne. Decision to Prosecute. Cambridge:MIT Press, 1977.

Whitney, Simon. Antitrust Policies. New York: Twen-tieth Century Fund, 1958.

Williamson, Oliver. "Commentary." In The PoliticalEconomy of Antitrust, edited by R. D. Tollison. Lex-ington, Mass.: D. C. Heath, 1979.

20

Occas onal PapersfromThe Law SchoolThe University of Chicago1111 East 60th StreetChicago, Illinois 60637

No. 1. "A Comment on Separation of Power"Philip B. Kurland, November 1, 1971.

No. 2. "The Shortage of Natural Gas"Edmund W. Kitch, February 1, 1972.

No. 3. "The Prosaic Sources of Prison Violence"Hans W. Mattick, March 15,1972.

No. 4. "Conflicts of Interest in Corporate Law Practice"Stanley A. Kaplan, January 10, 1973.

No. 5. "Six Man Juries, Majority Verdicte-What Difference Do They Make?"Hans Zeisel, March 15, 1973.

No. 6. "On Emergency Powers of the President:Every Inch a King?"Gerhard Casper, May 31, 1973.

No. 7. "The Anatomy of Justice in Taxation"Walter J. Blum and Harry Kalven, Jr., October 1,1973.

No. 8. "An Approach to Law"Edward H. Levi, October 15, 1974.

No. 9. "The New Consumerism and the Law School"Walter J. Blum, February 15, 1975.

No. 10. "Congress and the Courts"Carl McGowan, April 17, 1975,

21

No. 11. "The Uneasy Case for Progressive Taxation jn 1976"Walter J. Blum, November 19, 1976.

No. 12. "Making the Punishment Fit the Crime:A Consumers' Guide to Sentencing Reform"Franklin E. Zimring, January 24,1977.

No. 13. "Talk to Entering Students"James B. White, August 15, 1977.

No. 14. "The Death Penalty and the Insanity Defense"Hans Zeisel, April 15,1978.

No. 15. "Group Defamation"Geoffrey R. Stone, August 10, 1978.

No. 16. "The University Law School and PracticalEducation"Carl McGowan, December 20, 1978.

No. 17. "The Sovereignty of the Courts"Edward H. Levi, July 15, 1981.

No. 18. "The Brothel Boy"Norval Morris, March 15, 1982.

No. 19. "The Economists and the Problem of Monopoly"George J. Stigler, July 1, 1983.

22