Competition vs. Property Rights
In my previous post, “Where Consumer is King,� I excerpted a speech by Federal Trade Commission Chairman Deborah Platt Majoras. In the comments that followed, Dan Coleman cited a statement from Majoras and then added an important observation:
“Most economic analysis ends up attributing most of the differences in economic performance to differences in labor and capital markets. This conclusion is incorrect. Differences in competition in product markets are much more important.�Coleman identified the conflict succinctly. Majoras and her fellow career antitrust lawyers support an economic model based not on property rights, but on a mystical view of “competition� that lacks substance. In fact, if you search the text of Majoras’s entire speech, the word “property� never appears. Majoras consistently invokes “competition�, and of course the subject of her speech was “unilateral or ‘single firm’ conduct,� which are really just synonyms for “private property rights�.Perhaps one day this will be further revised to: “Most economic analysis ends up attributing most of the differences in economic performance to differences in competition in product markets. This conclusion is incorrect. Differences in private property rights are much more important.�
In its mystical form, “competition� cannot be defined with any precision. After all, Section 2 of the Sherman Act has existed for well over a century, and even in 2006, the nation’s chief antitrust regulator cannot explain what conduct is expressly prohibited. “Competition� therefore can only be defined by revelation, as regulators “discover� its meaning on a case-by-case basis.
As Dr. Reisman and others have written, the economic defense of antitrust is based on the false theory of “pure and perfect competition,� which itself is an undefined term—“the procedure is merely to present a list of conditions which it requires,� Reisman has said. The basic premise, however, is that perfect competition drives prices down to the level of “marginal cost� such that no seller has any direct control over price. As Majoras might argue, the “consumer is king� because no seller can do anything to affect the market, and thus competition is “pure and perfect�.
Of course, under such a model, the economy would be stagnant, as there would be no incentive for sellers to innovate and, as Reisman put it, “production and consumption [would] consist of an endless repetition of the same motions.�
But while “pure and perfect competition� is the passion of pro-antitrust economists and academics, it does not, I believe, explain the day-to-day actions of regulators like the FTC. Majoras and her fellow commissioners hold political jobs, and few politicians adhere to pure theory.
Politicians are motivated by expediency. Presidents and members of Congress never think past the next election, but members of the FTC are appointed for fixed terms that are usually not renewed. FTC members have to exercise as much power as they can during the terms, and perhaps importantly, they can enhance their post-government value to nominally private firms by “discovering� new areas of regulation.
The FTC’s authorizing statute does not specify any requirements to be a commissioner, but in recent practice, virtually all commissioners are career antitrust lawyers. Chairman Majoras served as the number-two official at the DOJ’s Antitrust Division during President Bush’s first term. Commissioner Pamela Jones Harbour spent 11 years as a top antitrust prosecutor in the New York Attorney General’s office. Commissioner Jon Leibowitz was chief Democratic counsel to the Senate Judiciary Committee’s antitrust subcommittee. Commissioner William Kovacic was FTC general counsel during the first Bush term and has spent the bulk of his career as a law professor and antitrust consultant for-hire. The newest commissioner, J. Thomas Rosch, was a partner at Latham & Watkins.
These are not individuals who care deeply about economic theory. They are people who depend on a strong—yet ambiguously-defined—antitrust regime as their primary source of income. The conflict of interest should be obvious. The more new law that a commissioner “discovers� during her term, the more “expertise� she can sell upon returning to the private sector in a few years. And because FTC members are legislators and judges, they can set their own agenda free of congressional or judicial “interference�.
So no amount of FTC hearings on the meaning of the antitrust laws will provide businesses with any more useful guidance than they already possess, which is to say not much. The best “protection� against antitrust violations is to retain a large law firm with one or more ex-FTC people on staff, because they have “expertise� and experience.
The alternative, of course, is to embrace an economy based on private property rights. Such rights are clear, objective, and should not require battalions of lawyers to define and re-define. Of course, where property rights are respected without exception, there is no income to be earned by regulators and professional antitrust lawyers like Deborah Majoras.
Comments (8)
Great article! I hope people will visit the web site of the New Institutional Economics and read some of the material. They're great promoters of the importance of property rights. In fact, the latest UN book on development gives center stage to property rights! Check it out!
The perfect competition idea is part of the problem, I agree, but another big issue is the Marx/Keynesian principle that capitalism naturally leads to monopolies. The later is a major element of the "folk Marxism" that's so popular with the media and academia.
Published: June 24, 2006 7:14 PM
This got me thinking. All too often we are told that free markets are successfull because of competition, but I'm beginning to think the truth is just the opposite. Free markets are successfull because they open up so many opportunities that people don't need to knock eachother down to get ahead - which allows the poor and weak space to succede where they never would have otherwise.
It reminds me of those "reality" tv shows, has anyone ever noticed how they have nothing to do with reality? Success in the real world often requires friendship, trust, loyality, coordialness, and cooperation more than it doesn't.
Also, looking at the PC, or the internet, or microwave, or the VCR, when these markets first started out there was almost no competition, not even a market, there was no one to compete against period. Even today, a quick look at the Linux vendors shows that almost none of them at this time are comepting head to head because the market is so wide open at this time.
Published: June 24, 2006 9:35 PM
It reminds me of those "reality" tv shows, has anyone ever noticed how they have nothing to do with reality? Success in the real world often requires friendship, trust, loyality, coordialness, and cooperation more than it doesn't.
What strikes me about the show "Survivor" is that it defines a universe in which the inhabitants have no liberty or private property. A slave world.
The fact that so many people are anxious to debase themselves in order to win a million dollars on a TV show is reminiscent of the dance marathons of the Great Depression. It doesn't mean that people are more greedy or less dignified than at other times, it means that their government has created economic circumstances which make it extremely difficult to achieve wealth by more honorable and dignified means - i.e. by making and selling something in the free market.
Published: June 24, 2006 10:29 PM
There's definitely a social cooperation vs. social conflict dynamic at work. In reviewing many "routine" FTC and DOJ cases, I'm struck at how determined agency lawyers are to manufacture a conflict. I recall one case where the DOJ forcibly dissolved a local physician group--without trial and with fabricated evidence--and one of the customers wrote the DOJ to argue that they were perfectly happy with the physician group's services. The DOJ's reply? "You would have been better off with competition."
In another case, the FTC stopped a merger in a niche software market. Three of the defendant company's competitors argued *against* the prosecution, because they believed that the market was sufficiently competitive as-is. The FTC ignored these arguments and proceeded.
Published: June 25, 2006 12:17 AM
The FTC like any other regulatory agency believes in the power of the law over the power of people to make their own decisions. In this case the FTC believes that their view of competition is what generates economic growth instead of what the competitors themselves believe.
What seems so simple to a business person or casual observer never gets to the regulators. That is competition does not make things better. Economic growth comes from competitors improving on their technology in an effort to make products more appealing to consumers in the hope of getting a short lived monopoly.
The best thing the FTC can do to promote competition is to get out of the way, or better yet lobby to get rid of the antitrust laws and the agency itself.
Published: June 25, 2006 11:05 AM
Henry, comparing today to the great depression seems rather off. Also, I thought the "dance marathons" were big in the twenties.
Published: June 25, 2006 1:01 PM
"Rather off"? Stay tuned ...
During the Depression, marathons reflected the status of America at the time. A heavily staged form of forced labor, marathons relied on the amount of time spectators and contestants, out of work victims of the Depression, had on their hands. Promoters found new ways of forcing the marathons to continue for months, enlisting entertainers and staging dramatic situations. They established ways of adding tension and excitement to the dreary competition, including races and complicated tests of endurance for the contestants; elimination contests that likened the marathons to the horrors of spectator sports in the Roman Coliseum. The chance at fame and fortune was there, but at the cost of humiliation at least, and at most, mental and physical health problems or even death. By the depressed 1930s, marathons took on new meanings: the pain and misery of the contestants helped spectators feel better about their own situations, while the prize represented a hope of the American Dream for contestants, probably never to be realized. It was certainly a far cry from the fun, voluntary sport that it had been in the 1920s. Wikipedia
Published: June 25, 2006 8:15 PM
O 3[h],
Way to nail it.
"the pain and misery of the contestants helped spectators feel better " is the Hallmark of today's media from A to Z.
Published: June 25, 2006 10:23 PM