Sunday, April 7, 2019

Amazon, Google Attacked Using Poor Theory and Fake Economic History

Elizabeth Warren and
Robert Reich
By Dominick Armentano

As political and academic progressives expand their frenzied attacks on “wealth” and on the alleged transgressions of “big business,” antitrust regulation is suddenly back in vogue big time.

As an example, take the off-the-wall proposal by Sen. Elizabeth Warren ( D-Mass.) that firms such as  Amazon and Google  be regulated as public “platform” utilities  and that several of their recent acquisitions  be divested to increase “competition.”  Or take the radical  perspectives of long-time progressive Robert Reich, who argued in a recent USA Today column  that  antitrust  regulation  should aim to break up Facebook,  Amazon and Google like  the courts  broke up the older “railroad, oil, and steel monopolies.”  According to Reich,“monopolists aren’t good for anyone except for the monopolists.”

In some sense these proposals and alleged historical accounts are not to be taken seriously since they are based on an almost total misunderstanding of monopoly theory and of the history of antitrust regulation.  On the other hand, the political power of poor theory and fake economic history should never be underestimated.

Senator Warren’s suggestion that we regulate Amazon and Google like governments regulate electric or water companies ignores the fact that public utilities are poor performing monopolies because governments protect them by law from competition.  On the other hand, Amazon and Google compete in free markets and have earned their respective market positions through efficiency and repeated customer support.

Ironically, both of these companies are antitrust targets of progressives precisely because of their success;  if Amazon or Google had performed poorly from a consumer perspective, both would both have lost market share and no one, not even progressives, would be demanding that they be regulated like some electric or water company.

In fact Warren and her fellow progressives have the regulatory issue with respect to free markets and public utilities almost precisely backwards. Instead of applying public utility regulation to successful free market companies, they should be thinking, instead, about ways to restructure public utility monopolies to perform more like Google and Amazon.   Ending legal monopoly status for utilities would be a  good place to start.

Robert Reich is similarly confused about antitrust history. In the case of the early steel industry, for example, there was never any “monopoly” and the dominant firm (U. S. Steel) was never “broken up.” It is true that U. S. Steel was charged with monopolization in 1911 but the case was dismissed by the Supreme Court (SC) in 1920.

Pointedly, the SC dismissed the case because they agreed with the lower court that U.S. Steel had significant competitors; that overall steel output had increased substantially; and that steel rail and steel ingot prices had declined over the alleged period of monopolization.  U.S. Steel was a large firm but they were not illegally monopolizing anything.

Reich ’s allegation concerning antitrust and some unidentified railroad monopoly is even more curious. I know of NO major antitrust case that sought to break up any railroad monopoly.  Indeed, the only serious “monopoly” associated with the railroad industry was  the creation of the Interstate Commerce Commission (1887) which existed to stabilize (decreasing) railroad rates, a classic case of government (not private) cartelization of an industry.

In the Standard Oil of New Jersey case (1911), it is true that the Supreme Court did find the company in violation of the Sherman Antitrust Act and ordered several of Standard’s subsidiaries to be divested from the parent company.  But contrary to Reich’s assumptions about what how monopolists behave–and despite Standard’s many acquisitions– the oil industry (exploration, refining, transportation, marketing) was never monopolized by Standard Oil or by anyone else.  The Standard  Oil Company always had dozens of rivals (such as Chevron, Texaco, Sun, Shell, Atlantic Refining, etc.) and always produced a high-quality product (mostly kerosene) which it sold  at lower prices…for decades.  Thus, contrary to Reich’s insinuations, Standard Oil earned its profits not by any monopoly exploitation but by ruthlessly reducing costs and by continually enhancing consumer welfare.

Contrary to the popular impression (which progressives share), antitrust regulation has a long and sordid history of both ignoring legal monopoly and of hampering, instead,  the free market competitive process.  Most of the classic “monopoly” cases in antitrust history involve firms that were expanding outputs, lowering prices and innovating rapidly, much to the displeasure of less-efficient rivals.  Supporters of regulation such as Elizabeth Warren and Robert Reich would do well to examine economic history more carefully before threatening to bludgeon efficient firms like Amazon and Google with regulation that both lowers economic efficiency and harms consumers.

Dr. Armentano is professor emeritus in economics at the University of Hartford in Connecticut and the author of Antitrust: The Case for Repeal.

The above originally appeared at 

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