It is recognized clearly in the case of an isolated individual or family that one occupation can expand only at the expense of all other occupations. Henry Hazlitt, Economics In One Lesson, p. 105.
It almost goes without saying that whenever a merger or corporate buyout is announced subsequent reporting will center on the anti-trust implications of such a combination. Though corporations are in theory acting in the best interests of their shareholders, the existence of anti-trust lawyers means that does not always pass muster with the Justice Department.
This sad reality reared its ugly head yet again yesterday with the Department of Justice’s decision to block the AT&T/T-Mobile (NYSE:T) merger. Much like Microsoft (NASDAQ:MSFT) over a decade ago, and A&P nearly 70 years ago, AT&T (NYSE:T) was damned no matter its future plans for the merged entity by an utterly confused DOJ. Assuming the blocked merger would have led to greatly reduced wireless prices for consumers or, in the reverse, higher prices due to allegedly enhanced pricing power, a schizophrenic Justice Department would have blocked the deal either way. For the broader economy, just another body blow among many restraining its natural evolution.
The argument for anti-trust watchdogs is that their existence ensures that no one company grows too large and powerful in one industry sector. No such presumed behemoth will be able to dictate prices and products thanks to monopoly powers achieved through combination. It’s a compelling argument at first glance but, as is frequently the case, the argument doesn’t hold once exposed to more thought when historical business realities are taken into account.
Business logic tells us that all companies -if well run – seek market power but, if successful, their profits merely serve as signal for new competitors to enter their line of business. In time that leads to lower prices. Even if private sector monopolies don’t find their profits reduced by new entrants, history tells us that, perhaps due to their size, they’re ultimately caught flat-footed when it comes to understanding new lines of business eagerly entered into by smaller competitors.
The very existence of anti-trust theory and laws rests on the presumption that government bureaucrats possess a hotline to the future of commerce. On its face that reveals the problem with such laws. Forcing companies not to seek the most profitable consolidations means that economic growth in total suffers for limited capital that remains locked up in sub-optimal areas.
The best solution in light of the DOJ’s latest trampling on economic advancement is for Congress to abolish anti-trust laws so that companies and industries can consolidate without regard to which way the political winds are blowing in Washington. No doubt some corporations will grow abnormally large and powerful under such a scenario, but the odds that they will stay dominant for a lengthy period aren’t so great.
Companies should seek monopoly positioning. Monopoly power is logically something all companies, if they can, should aggressively seek. That effort itself intensifies competition. To serve their shareholders, it’s essential for companies to find an area of commerce where their pricing power is greatest, and as such, potential for profit is greatest.
Importantly, what is very much in the interest of shareholders is hardly anti-customer. Indeed, the larger the profit, the larger the need fulfilled by the presumed monopolist. For a business to go about in ultimately successful pursuit of monopoly profits is for that business to fill a commercial space that is presently empty, and that represents an unfulfilled desire on the part of customers.
Rather than recoil in horror at businesses seeking monopoly profits, sound thinking tells us that we should cheer this speculation because it tells other economic actors where consumer needs are most unsatisfied. Whether the speculation is successful or not, the intrepid and natural pursuit of profit by the business concern transfers an essential bit of market information.
Even if any business is able to secure monopoly power and all the profits that such success presumes, the achievement almost by definition leads to a loss of that hard won power in due course. Businesses are nothing if not nimble, and once profitable lines of business are revealed in the marketplace, new companies quickly follow the monopolist in search of outsize profits. As competitors seek the business of voracious customers, prices fall. Only artificial barriers to entry imposed by government intervention can block this natural process.
An easy example would be the one-time Internet giant Netscape. Having speculated correctly that the Internet was the “next big thing,” Netscape loomed large in the mid 1990s, and its rise signaled to others that entry into the Internet space would be rewarded by investors. Though briefly in possession of monopoly power, competition ultimately rendered Netscape weak enough to be swallowed by AOL (NYSE:AOL) within a few years.
Can’t companies grow too powerful? Not unless their power is sustained by artificial barriers to entry. Rather than decry the growth of a company that leads to economic and pricing power, we should instead celebrate it for signaling a company serving customers well enough to grow large. The sole constituents of companies are always the shareholders, but shareholders can only be served if customers are made happy. Quite simply, if companies grow large, they must be doing something right.
Still, the argument persists that some companies can grow too powerful, and if so, anti-trust authorities must check their growth with consumers and their competitors in mind. This sounds appealing, but it doesn’t stand up to history. Markets have done a great job on their own when it comes to eroding the monopoly position of companies that in the present are deemed to have grown too powerful.
On the subject of allegedly excessive economic power, the name John D. Rockefeller Sr. comes up most often. But his story merely tells us why the existence of anti-trust laws is superfluous.
In building energy behemoth Standard Oil, Rockefeller proceeded to purchase myriad oil refineries in search of the efficiencies wrought by consolidation. This naturally raised the ire of those fearful of monopoly but, as historian Ron Chernow noted in his biography of Rockefeller, many would have gone out of business if they had not been purchased by Rockefeller.
The Rockefeller story refutes the argument made by anti-trust advocates that those with alleged pricing power will increase prices once the competition is purchased or vanquished. Fearful himself of the competition that profits bring, according to Chernow, “during his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from this gospel of industrial efficiency.”
As always, success begets imitators, and Rockefeller’s profits did just that. As Chernow found, by the early part of the 20th century, oil discoveries in the United States and around the world made Rockefeller’s presumed eternal monopoly more than ephemeral. Absent Standard’s eventual breakup by government force, its dominance was set to decline either way. Though Standard’s market share was 85% in 1890, by 1911 competition had reduced it to 64%, thus revealing in simple numbers that market forces would have eventually done for the energy market what the government harmfully did by force.
Moving ahead nearly to 1974, congressional staff member Brad Snell wrote that “GM (NYSE:GM) is the world’s largest industrial enterprise and the world’s largest private government. It is, in effect, a sovereign economic state, unaccountable to the citizens of any country…” Opining on GM’s power, John Kenneth Galbraith wrote in The New Industrial State that “Size allows General Motors to set prices for automobiles, diesels, trucks, refrigerators and the rest of its offerings and be secure in the knowledge that no individual buyer, by withdrawing his custom, can force a change.” In 1976, American Motors Vice President Gerald Myers said that “GM has never been so aggressive”, and “If they don’t watch it, they might find themselves selling the whole market.” Another AMC executive added about GM, “If they wanted to wipe out everybody by 1980, the only one who could stop them is the government.”
Of course as time revealed in living color, GM decidedly could not dictate prices, styles and other competitors. Rather than the federal government needing to restrain its perceived monopoly power, it was ultimately the government that stepped in to save GM on the backs of American taxpayers. Ford Motor Company too was once deemed all powerful, but this market influence didn’t prevent consumers enmasse from declining to buy the Edsel. In the case of beverage giant Coca-Cola (NYSE:KO), “New Coke” had to be withdrawn from the market once consumers rendered their quick, unhappy judgment on the new taste.
In more modern times, software giant Microsoft (NASDAQ:MSFT) was deemed a monopolist by the Justice Department, and it was said there once again that Microsoft’s market power was restraining competitors from introducing new innovations. That may have appeared true for a time, but market forces once again worked their magic. Microsoft (NASDAQ:MSFT) was first caught flat footed on the rise of the Internet, and then within that sector by the importance of search engines. Its shareholders suffered over a decade of flat share-price performance.
The realm of sports provides further examples. What’s not apparent to anti-trust lawyers, who presume to see the future, is very apparent to those who follow the games people play. Green Bay Packers quarterback Aaron Rodgers was named MVP of the latest Super Bowl. But coming out of high-school he couldn’t even secure a college scholarship and had to attend Butte Community College before Cal-Berkeley and Coach Tedford came calling. The Packers’ best defensive player, Clay Matthews III, had such low prospects in high school that he had to “walk on” at USC, only to force the fumble in the Super Bowl that led to the Packers’ victory.
The stories of Rodgers and Matthews tell us is that it’s a fool’s errand to predict the future based on the present. As in sports, so also in business. Not long ago social network MySpace.com was all the rage in that sector of the Internet, only to be made irrelevant more recently by Facebook, a company started by a college dropout. Not only are anti-trust laws made unnecessary by market forces, but business and sports history is littered with “can’t miss” concepts and opportunities that sooner or later slid into irrelevance.
Superfluous strengths ultimately weaken companies. The stories of Standard Oil, General Motors and Microsoft tell us that markets, if left free, will ultimately reduce the market power of companies deemed too large.
Sadly, anti-trust laws are not merely irrelevant. Indeed, their mere existence means that if companies grow too large in the eyes of the Justice Department, they then face many years of legal hassles from public officials eager to break them up or reduce their power. Rather than continuing to serve the customers who originally made these companies large and powerful, precious resources are wasted on seeking favor with the federal government.
Considering the companies whose mergers or buyouts do pass muster with anti-trust officials, often these combinations are only allowed to be completed if assets that the DOJ feels make them too powerful are sold off. Though the Texaco/Getty merger was ultimately allowed by DOJ in the ’80s, it only was after 600 key service stations were sold off to competitors. In short, anti-trust laws force companies to weaken themselves in ways that wouldn’t otherwise occur in a marketplace free of these rules.
In the above case, the “seen” involves government-enforced asset sales explicitly meant to weaken corporations otherwise eager to please shareholders by virtue of growing stronger. But the “unseen” is perhaps a great deal worse. The unseen in this equation are all the mergers and buyouts that would promote better use of capital, but that never see the light of day. Broad fear that anti-trust attorneys at Justice will block what looks good on paper and would be cheered by investors closes those avenues.
Not spoken of enough is another bit of collateral damage wrought by anti-trust. Simply put, it’s sometimes said that big companies grow big by virtue of cobbling together myriad businesses that have no relation to each other, and that force executives to reach far afield into areas well beyond their core competency. That may well be true. But it should be said that one reason companies use mergers and buyouts to expand outside the areas they know is the anti-trust laws. The Justice Department frowns on consolidation within specific sectors, but allows for growth into areas where successful companies are less prominent.
Human, mechanical and financial capital is precious. What’s arguably forgotten most by anti-trust advocates is the basic truth that we live in a world of limited capital. Every economic activity involves a trade off in terms of other work that can’t be done, so when rational, market-driven consolidations are held up by government officials, the entire economy loses.
Indeed, the beauty of mergers and buyouts is that in order for them to achieve investor approval, they must lead to significant cost reductions as redundant human, mechanical and financial capital is released to other, more economically valuable endeavors. Adam Smith looked askance at stationary economies as capital repellents. Anti-trust laws, by retarding the natural efficiencies earned through consolidation, promote stationary economic results at the expense of constant enhancement that results in increased capital flows to the businesses looking to produce the most with the least capital input.
The simple truth is that we’re always and everywhere limited in our economic advancement by a scarcity of capital. By putting up barriers to the financing of new production endeavors anti-trust laws make it more scarce. At their core, anti-trust laws are anti-innovation and anti-growth.
Looking at AT&T/T-Mobile, implicit in DOJ’s faulty decision is fear of too much market power. What’s missed is that the financing that made the deal possible would never have materialized had AT&T sought the deal to raise prices on consumers.
That’s the case because as anyone in business knows, profits are what attract competition meant to erode the leader’s pricing power. Looking back at one-time grocery giant A&P (market forces eventually rendered it irrelevant), the Hartford brothers who ran it aggressively sought deep discounts for customers, and better yet, made sure to maintain lower margins as a defensive mechanism; their desire for low costs a boon to consumers. AT&T/T-Mobile doubtless feel the same, that it would be suicide to raise prices on consumers, but for seeking consolidation that would have made the consumer and shareholder better off, their reward has been a block of the merger.
Conclusion. Anti-trust laws, like other rules and regulations foisted on the marketplace by governments, presume that the future commercial outlook will resemble that of the present. Government officials feel they must restrain corporate dominance that otherwise would continue without endpoint. In fact, as business history has revealed time and again, past or present performance is no indicator of future performance.
The prominent companies of any era, as evidenced by the ultimate erosion of Standard Oil’s market share, Microsoft’s soft descent into large but prosaic earnings, and GM’s implosion reveal all too well that even the grandest of corporate entities will eventually be caught unawares by new discoveries. New entrants will restrain their market power far more effectively than can governments. The reason is that profits attract imitators; with monopoly the most profitable status of all, it’s tautological that wealth-seeking entrepreneurs will eventually pierce the façade of the very companies thought to be untouchable.
Most important, anti-trust laws should be abolished to permit the mergers and consolidations that they presently prevent. These laws restrain the necessary release of limited capital of all types to their best, most economy-enhancing use. Anti-trust laws, by subsidizing the status quo, are by their very nature anti-growth, and the U.S. economy would be much better off without them.