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Those
Who Cannot Remember the Past ... For antitrust enforcers, memories of the 1960s are bathed in a golden glow. That was an era when the government won almost every time it challenged a business arrangement. Regulators were limited only by a requirement that they invent a mildly plausible scenario under which the arrangement might be regarded as "anti-competitive." Because this key concept could be given any of several not-necessarily consistent meanings, inventing a passable scenario was usually easy. It became anti-competitive for a group of independent grocery stores to integrate some of their activities to better compete with large chains, for example, or for companies to merge in an effort to increase efficiency. All sorts of subtle vertical arrangements were condemned, and the catalogue of pointless or destructive cases grew long. The tide of hubris receded in the 1970s and 1980s largely because of an intellectual assault on antitrust doctrines led by the Chicago School of Law and Economics, which noted that most of the government's scenarios were highly implausible and that many of the condemned practices would benefit, rather than injure, consumers. The antitrust officials of the 1980s, who understood this work, pulled antitrust back to its respectable core of preventing cartel behavior and stopped its use as a vehicle for free-form social engineering. Business lawyers, who do not see the antitrust of the '60s through a golden haze, thought the era was safely gone. Think again The current probe of Microsoft is producing an acute sense of deja vu. Just as teenagers all over the country are hauling their parents' musty 1960s clothes out of back-room closets, the antitrusters are airing 1960s attitudes and doctrines and saying, "Hey, I can use this!" The Justice Department's Antitrust Division seems to be taking the position that Microsoft needs to be regulated, and we will craft the theory later, just like we used to do in the good old days. Leaving aside the technical issues about the meaning of "tying" under the law, or the exact wording of the existing consent agreement, the gist of the government's position is that controlling Microsoft is necessary for the greater good of competition even though it is difficult to point to any existing standard that has been transgressed. In the 1960s, this approach triggered many bad results, culminating in the IBM litigation, a formless disaster of a "monopolization" case that never specified precisely what IBM monopolized. The case lasted from 1969 until 1982, consumed hundreds of millions of dollars, and ended with a whimper when the government told the trial court that it had conducted a review and "has concluded that the case is without merit and should be dismissed." The possible parallels between the new Microsoft probe and the old IBM case have received considerable media play. But to reinforce a recognition that high-handed antitrust enforcement can produce seriously unfortunate results, another unsettling bit of history also deserves some attention. In the 1950s and 1960s most antitrust lawyers regarded General Motors as a special kind of regulated company. It was assumed that if GM's market share ever rose much above 50%, government trustbusters would move to break it up. Destructive government intervention The exact theory the government might have used against GM was always a little murky, but, given the zeitgeist, it was clear that an assault would stand an excellent chance of success. One lawyer friend who was fond of wagering said, "If it got to the Supreme Court, I'd bet on the government and give you two judges." For years GM acquiesced, held a price umbrella over its competitors, split the loot with the United Auto Workers and made sure that neither its conduct nor its share ever triggered the thunderbolts. The results were bad for both the American auto industry and the American people. The industry acted as the economic theorists tell you a regulated industry will act. Price competition became a shadow of the early days of automobiles, technical progress slowed, production techniques stagnated, product differentiation stopped with the body shell, safety was ignored, small cars disappeared and quality declined. An industry that had produced a series of revolutions in consumer welfare between 1910 and 1940 grew stagnant, and the next great revolution was made in Germany and Japan, not the U.S. It took the form of small cars, good quality control, lean production, just-in-time inventory and other novel techniques, and it woke U.S. consumers up to the reality that they were being shortchanged. "What if" history always must be speculative, but it is hard to see the threat of government intervention as anything but destructive to the auto industry. The official response to the fear of monopoly actually encouraged a monopoly, albeit one divided into three divisions. Had competitive energies been left free, many good things would have happened, such as pressure on U.S. companies to improve quality and early development of lean production and niche markets, not to mention more intense technological competition, the erosion of the model-year system, price reductions and innovative retail networks. Hunting an illegal monopoly History never repeats itself exactly, and the gulf between the auto industry of 30 or 40 years ago and the contemporary software industry is great. Microsoft's market share is not the 50% that GM held in the auto industry, but 5%, if you include all business software and not just the personal computer. There also are great distinctions between a heavy consumer durable like the automobile and gossamer intellectual products such as software, as well as huge differences in global competition and the whole infrastructure of the economy. These differences make the atavistic consistency of the government's position all the more depressing. It is like watching an aging hippie squeeze into the old bell-bottoms to go hunt a peace demonstration. As was true for the automobile industry, the exact theory to be used is left murky. "Tying" is flung around in good 1960s style, ignoring the detail that the 1970s revolution in antitrust thinking demonstrated that the term is basically meaningless, except under some very limited conditions. To the extent integration produces an outcome more cheaply and conveniently, consumers benefit. Similarly, as in the 1960s, the antitrusters presume that they understand market structure in terms of what will develop both with and without their efforts. Nonsense. In the case of the automobile industry, the government had even less clue to what was brewing in Japan than did the industry itself. In the late 1970s, the Federal Trade Commission thought foreign competition was irrelevant to the auto industry's structure. And predicting the automobile industry was a far easier problem than predicting development of the software industry in the highly fluid world of the present. The probabilities that government action will do harm rather than good are overwhelming. History worth repeating? George Santayana is famous for the line: "Those who cannot remember the past are condemned to repeat it." A later historian added a wry corollary: "Unfortunately, those of us who do remember the past are condemned to repeat it with them." Those of us who remember this antitrust past would rather not repeat it in this new context. We also would like to paraphrase another observation of Santayana's and note that fanaticism consists in redoubling your efforts when you do not know your aim.
Washington
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