"Public Choice and Public Choices: Consumers and the Politics of Antitrust"

Apr 08 2001
Publications

Presented to the 47th Annual Conference of the American Council on Consumer Interests, Washington, D.C., April 7, 2001

Consumer Interests AnnualVolume 47,2001

Public Choice and Public Choices: Consumers and the Politics of Antitrust

Although they have a natural ambivalence toward the way markets sometimes operate, consumers depend on antitrust as a fundamental consumer protection tool. The recent election will move antitrust in a more conservative direction, but antitrust will not return to the ultra-conservative direction of the 1980's, despite libertarian efforts. Libertarian adaptations of public choice theory, used to criticize the Clinton Administration's antitrust chief, need to be recognized by consumers as a fundamental trashing of the idea of positive government.

Albert A. Foer, President, American Antitrust Institute

If consumerism sometimes seems ambivalent in its attitude toward the way markets actually work, this is understandable. Markets bring together consumers and producers, like labor and management, on two sides of a bargaining table. Economists call consumers collectively "Demand" and call producers collectively "Supply." The only problem is that unlike the collective bargaining situation where a negotiator knows on which side of the table he or she sits, with the market each of us necessarily wears two hats. We are consumers when we spend, but producers when we earn that which can be spent. We therefore have an interest on both sides of the counter. This fundamental observation colors our view of the relationship between the state and the market.

Consumers and Producers; Consumer Protection and Antitrust

Wearing the consumer hat, we feel put upon by business, big or small. "Caveat emptor." Business wants our money and will stretch the limits of the law, not to mention morality, to get it. Since the consumer is generally a relatively powerless individual, we need the help of government, through regulation and law enforcement, to protect us against the corporate power of producers. The more government, therefore (at least to a point), the better.

But wearing the producer hat, we see a problem. As producers, we have confidence in our own probity and believe we can be trusted to treat others fairly. Moreover, we have seen government intervention and it only seems to make our life more difficult. It adds to our costs, which we have to pass along to consumers. It interferes with our ability to bring new and exciting products to the market. It restricts our ability to tell our story in appealing ways. Government, indeed, reduces our productivity and hence the income we will be able to carry over to our role as consumers.

Thus, when we visit the market, we are neither purely consumers nor purely producers, and our attitude toward the market itself carries a fundamental ambivalence.

As an antitrust lawyer, I have noticed that there are four major schools of thought concerning markets and the state. From political right to political left, in the antitrust context, they are: libertarian, neoclassical, post-Chicago, and populist. The libertarian believes that property rights are more or less holy, and therefore so are the law of contracts, and markets in which property rights can be voluntarily exchanged through contracts. Government's role in the economy should be limited to those public functions, like military defense, that cannot be organized in the marketplace. The Cato Institute, the Heritage Foundation, and the Wall Street Journal editorial page often reflect a libertarian perspective.

Neoclassical free marketers, whom I will refer to as the Chicago School, believe that markets are the key to maximizing the society's productive output, that markets rarely fail, and that the state rarely makes things better. The American Enterprise Institute generally reflects a Chicago orientation.

Post-Chicago marketers, like neo-classical free marketers, tend to have a large amount of confidence in markets and approach regulatory issues with an orientation toward economic analysis; however, they find additional goals competing with efficiency, such as innovation and consumer choice, they are less sanguine that economic man acts "rationally" in the neo-classical sense, they observe market failures more often than the Chicago School, and they have more confidence in the ability of regulators to intervene in the presence of market failure. The American Antitrust Institute is a post-Chicago advocate.

Populists, finally, tend to focus on institutions rather than on markets. They have little confidence in markets, worry about the social and political impact of large economic units in private hands, and have a high level of confidence in the potential of government to represent the interests of the individual and small entrepreneur.

Where one stands with these schools is reflected in what one sees as the proper role of antitrust. Libertarians (at least some of them) may grudgingly agree that a conspiracy among direct competitors to fix prices should be condemned as an illegal corruption of the marketplace, but any larger role for antitrust is deemed to be evil regulation. The Chicago School takes a narrow view of antitrust, but less narrow than the libertarians. Chicago tends to acknowledge the possibility of anticompetitive behavior, but is easily convinced that there are efficiencies to be gained from most relationships entered into by businesses, and while theoretically open to the need for antitrust, usually comes down thinking that it is either unnecessary to intervene, because the market will eventually self-correct, or that government has its own inherent failures that make successful intervention unlikely. Post-Chicago marketers view antitrust as a light form of regulation, based on economic analysis leavened by an empirical orientation and a certain sense of outrage when economic power is misused. They tend to see the antitrust laws as underutilized. Populists, finally, see the antitrust laws as fairly useless at containing corporate power. Few mergers are stopped, monopolies are rarely challenged, and economists stand in the way of doing anything meaningful, like breaking up big companies. For the populist, antitrust is capitalism's fig leaf, a government tool that generally leaves big business alone, except periodically to bring a "show" case to maintain the pretense that the public is in charge.

As a consumer, I said, one should have a certain ambivalence about markets. I would argue that libertarians are so completely on the side of producers that they have forgotten their other role as consumers. I would argue, also, that populists are so thoroughly on the side of consumers (who are taken to be more or less synonymous with "the people") that they have forgotten their role as producers. Neither libertarian nor populist has much use for antitrust. Antitrust is really a centrist notion. While the neo-classical free marketers approach antitrust with skepticism and don't want to see it used with much liberality, they nevertheless consider it an important feature of a capitalist economy. While the post-Chicago marketers approach antitrust with the sense that it is not sufficiently utilized, they share with their Chicago brethren a sense that a market economy, with decentralized decision-making, is generally a good thing for consumers.

The topics of antitrust and consumer protection are more closely related than many people are aware. I commend to you an article by Neil W. Averitt and Robert H. Lande, "Consumer Sovereignty: A Unified Theory of Antitrust and Consumer Protection Law," in the 1997 Antitrust Law Journal.i Averitt and Lande demonstrate that "The antitrust laws are intended to ensure that the marketplace remains competitive, so that a meaningful range of options is made available to consumers, unimpaired by practices such as price fixing or anticompetitive mergers. The consumer protection laws are then intended to ensure that consumers can choose effectively from among those options, with their critical faculties unimpaired by such violations as deception or the withholding of material information. Protection at both levels is needed in order to ensure that a market economy can continue to operate effectively."ii This leads me to two topics relating to the contemporary politics of antitrust. First, I will try to describe what the election of George Bush means for antitrust. Second, I want to describe a politically colored way of looking at regulation called "public choice theory" and explain how it has been used and abused in describing antitrust, as a case study in the danger that public choice represents to the consumer movement.

The Bush Administration and Antitrust

The election of 2000 did not turn on antitrust. This is not news; antitrust is rarely a salient political issue. In the recent campaign, despite the high salience of the Microsoft case, neither the primaries nor the general election featured controversy over antitrust. This meant that neither Bush nor Gore was forced to declare a position on this subject, so that either victor would have had an opportunity to set his own direction, unfettered by track record or rhetoric.

This does not mean, however, that the candidates were likely to carry out identical antitrust policies. Importantly, they did take different positions regarding the role of government more generally. Neither Bush nor Gore would speak of an expanded role for central government, but Bush was more critical and Gore more accepting of an activist State. Gore in all likelihood would have continued the antitrust policies of President Clinton, which I will describe as moderately aggressive and leaning toward the post-Chicago range in the spectrum I previously described. Bush had two visions to select from. President Reagan's Administration had represented a major break with antitrust's past, bringing to senior positions lawyers and economists who were committed to the Chicago School and often tinged with libertarianism. On the other hand, President Bush, the candidate's father, had installed officials who brought antitrust back to life, albeit gently and gradually. The libertarian tinge was gone, and a more activist version of the Chicago School took charge. George W. Bush, who gave no evidence during the campaign that he had ever thought about antitrust, would have to make known principally through his appointments whether his antitrust Administration would be more like Reagan's or more like the first Bush's.

There were several reasons to predict that the fruit would fall near the tree. First, George W. Bush portrays himself as a compromiser and management maven rather than ideologue, who wants to work in a bipartisan fashion. Antitrust, through most of its history (with the Reagan years as the primary counterexample), has had bipartisan support. This was particularly true during the Clinton Administration, which had the comfortable support of the leading antitrust influentials in both the House and the Senate. In the House, these were Chairman Hyde and Ranking Member Conyers of the Judiciary Committee, and in the Senate, Chairman Hatch and Ranking Member Leahy of the Judiciary Committee and Chairman DeWine and Ranking Member Kohl of the Antitrust Subcommittee. Hatch, Leahy, DeWine and Kohl all retain their positions in the current Congress and can be expected to demand a continuation of Clinton-era levels of antitrust. The House, without an antitrust subcommittee, is more difficult to predict. A limitation on chairmanship terms has moved Henry Hyde to another committee, to be replaced on Judiciary by James Sensenbrenner, a Member with little background or notable interest in antitrust. Given the Senate's likely dominance in the antitrust arena, a pragmatic, bipartisan strategy for Bush would be to follow in his father's footsteps as a moderate antitruster, rather than to take Reagan's example and attempt a severe cutback in direction.

There are other reasons that would make it difficult to turn back the clock in a libertarian antitrust direction. In 1980, the states played a much smaller role in antitrust than they do today. Today's state-level activism, manifested for example in the 20 states that are participating in the antitrust case against Microsoft, was a by-product of the Reagan Administration's undermining of the federal antitrust presence. Consumers want antitrust. Consumers vote. Elected Attorneys General will walk into an antitrust vacuum to provide a supply of antitrust. If today's Bush Administration were to wander too far off the antitrust reservation, the States would be there to fill the gap.

In 1981, international antitrust was unimportant. Today, roughly one hundred countries have competition policy regimes. This, too, may be a byproduct of the Reagan Administration, if you credit Reagan for knocking over socialism and inspiring countries to adopt market economies and the competition policy laws that go along with market economies.

In antitrust, a form of Gresham's Law is likely to operate: stronger antitrust pushes out weaker antitrust. Companies have to shape their actions to comply with the toughest law enforcement they expect to be up against, not the weakest. If the U.S. were to back off from antitrust, the rules would be set by the states and in many situations by foreign authorities. The result for today's Bush is that a failure of the U.S. to keep pace with the European Union's DGIV and other aggressive enforcement agencies would leave the U.S. looking wimpish and would keep us from playing a leadership role in the new international institutions defining and carrying out competition policy.

But there are also countervailing considerations. The role of international competition policy, though growing rapidly, is still comparatively small for domestic companies. The states have very limited antitrust resources, and many of the states are controlled by Republicans who will not likely go to war with the Bush Administration. Finally, the pragmatic, managerial character of the incoming Bush Administration, so apparent in the selection of Cabinet-level officers, seems to be increasingly thrown into question by the appointment of second- and third-tier officials, who tend to be much more ideologically conservative. With respect to the top antitrust officials, nominees have been announced, but confirmation hearings have not yet been held. Both Charles James, the likely Assistant Attorney General for Antitrust, and Timothy Muris, the likely Federal Trade Commission Chairman, are well-qualified professionals in the field, which is a plus. Both have strong credentials as conservatives of the Chicago School variety.

Bottom line: antitrust will not go away, but will also not be anywhere near aggressive enough to meet consumer needs.

Public Choice and Public Choices

Antitrust is a mild form of regulation, quite different from many types of economic regulation that mandate prices, terms of trade, entry and exit criteria, and so on. Nonetheless, libertarians attack antitrust as part of their allergic reaction to government. They often do this through application of public choice theory. The central premise of public choice analysis is that "political actors are just like everyone else;..they should be viewed as rational individuals who act in self-interest."iii When government makes choices for the public, this theory predicts, the choices will in reality be made by individuals acting in their self-interest, and not in some selfless public interest.iv

It will be most interesting to see if libertarians apply public choice theory to Bush's antitrust chief. Here is what the Wall Street Journal wrote about Clinton's chief, Joel Klein:

The truth is, an antitrust chief who brings no prosecutions can expect no rewards in terms of media attention and career visibility... Mr. Klein came to town looking for opportunities to expand his portfolio. His enterprise might be praiseworthy in another line of work, but government power is being used to muck capriciously with the rights of private companies and their shareholders...We doubt Americans want the businesses on which their jobs and wealth and retirements depend to be a free-fire zone for the next ambitious bureaucrat who happens to be passing through town.v

In another venue,vi I explored some of the themes that the Journal so graciously expounded in its attacks on Klein. I identified six themes: (1) Antitrust is untrammeled policy masquerading as law enforcement. (2) The relevant time frame for antitrust analysis is the next election. (3) Antitrust officials are driven by the personal rents to be extracted from public office. (4) The "public interest" [in quotes] is not a disinterested goal of antitrust enforcement. (5) The sole criterion for enforcing the antitrust law is winning the case. And, (6) if antitrust enforcement disappeared, the public wouldn't miss it. There is a nugget of truth buried in each of these themes, I concluded, but the overall effect is both grotesque and dangerous.

To be consistent, the Journal and its libertarian friends will have to take the same position with respect to Charles James, the Republican candidate for Assistant Attorney General for Antitrust, no matter what he does in office. For, if we are to believe their rhetoric, the libertarians weren't attacking Klein as an individual. They never said that he took money for his decisions or that he was in any way a dishonest bureaucrat. He was being attacked as a bureaucrat per se. That is, all of us have the original sin of seeking out our own best interest, and when you put us in office, that is what we will do. Because we are programmed to do this, then there can be, by definition, no public interest. All interests are private. Whether enforcing the antitrust laws or any other laws, a bureaucrat is a bureaucrat is a bureaucrat.

Let me emphasize this. Under the libertarian reading of public choice doctrine, government cannot serve the public interest, because government is composed of individuals, and individuals, as rational actors, can only seek out their private interest.

Because many of you have convinced yourselves, as I have convinced myself, that there is a public interest and it is worth fighting for, you probably think this is nutty. Not only does it render antitrust impossible by purporting to demonstrate that any law enforcer is exercising untrammeled discretion for personal benefit, it actually covers any area of regulation in the same manner. Consumers need to understand public choice, taken to this extreme, to be nothing less than a fundamental trashing of the idea of government.

At the same time, public choice theory should not be totally dismissed. It can be helpful in focusing attention on the discretionary and political aspects of antitrust and other consumer protection regulation. To return to the six points made by the Journal, even if there is something that resembles "the public interest," it is not obvious what that is. Even if antitrust, for example, is not (as the libertarians would have it) untrammeled discretion, it does incorporate large and important elements of discretion. Even if antitrust decisions are not tied to elections, no observer would say that politics is totally irrelevant. Even if antitrust officials do not make their decisions on the basis of personal gain, there is certainly no doubt that the next job may sometimes color one's performance in office. Even if winning the case is not the only reason an antitrust enforcement official initiates an investigation or files a complaint, win-ability is, not unreasonably, one of the factors given great weight. And even if the American public does not think about antitrust or understand it or frankly care very much about it from day to day or year-to-year, there is good reason to remember the song, "You'll never miss the water till the well runs dry."

My seventy-nine-year old Aunt Betty, who is a famous shopper in Boca Raton but whose only knowledge of antitrust is that her nephew is somehow involved, called me up one day-she loves the telephone-- and she complained, "If all these companies keep merging, I'm only going to have one place to shop." She gets it. As a consumer, as a member of the public, she needs choices. She needs competitors who will try to win her business by selling their products at fair prices set in a competitive market, who will compete by offering new products and better service. She may not know much about what antitrust is, but she knows she needs it.

i 65 Antitrust L. J. 713-756. iiId., 713-14. iii Stephen J. K. Walters, Enterprise, Government and the Public, 86 (McGraw-Hill, 1993). iv See Fred S. McChesney & William F. Shughart II (eds), The Causes and Consequences of Antitrust: The Public-Choice Perspective (1995). vWall Street Journal, editorial page, July 21, 2000. Also see Holman W. Jenkins, Jr., "All Wires Lead to Washington," The Wall Street Journal, July 5, 2000. Klein decided to ignore factors "that might tend to lessen the justification for throwing his weight around. Instead he relies on calculations that only compute if his temporal horizon is the next election, when he's likely to be out of a job, so he has to extract what personal rents he can from appointive office in the meantime." vi Albert A. Foer, "The Politics of Antitrust in the United States: Public Choice and Public Choices," 62 Univ. of Pittsburgh L. Rev. vol. 3, forthcoming.