Presumptions Are Not Facts

by Don Boudreaux on May 18, 2009

in Antitrust

Here's a letter that I sent to the Washington Post:

Seeking more active
application of antitrust regulations, Steven Pearlstein wants the
Supreme Court to reject "the view of Chicago school economists" – a
view in which, according to Mr. Pearlstein, "monopolies are actually
good for consumers because they attract the money and talent necessary
for innovation" ("Can Obama Bring Back the Trust Busters?" May 17).

Mr.
Pearlstein seriously misunderstands Chicago-school economics.  Those
economists do not believe that "monopolies are actually good for
consumers."  Quite the contrary.  What the researches of these
economists do reveal, instead, is this: First, competition is so robust
that it is seldom, if ever, squelched by firms who do not enjoy special
government privileges; second, being big and/or extra-efficient does
not make a firm a monopolist; and third, antitrust statutes themselves
have often been used to restrain competition.

It's disappointing that Mr. Pearlstein's understanding of both Chicago-school economics and of antitrust is so superficial.

Sincerely,
Donald J. Boudreaux

Be Sociable, Share!

Comments

comments

52 comments    Share Share    Print    Email

{ 26 comments }

indiana jim May 18, 2009 at 12:39 pm

Some background on Pearlstein's perspective on bloggers like us, quote from Glenn Greenwald:

"People like Pearlstein are entirely unaccustomed to hearing widespread criticisms of their work, especially from the lowly masses (also known as his "readers" or, more distasteful still, from prize-less "bloggers"). When thin-skinned establishment mavens encounter such criticisms for the first time, they often develop resentment over their treatment and devote themselves to a crusade against those whom they blame for their terrible plight (nasty, disrespectful "bloggers"). Behind virtually every vocal establishment critic of "blogs" is some episode in the past where they were widely criticized by bloggers and their readers, and their lashing out — though masquerading as devotion to high-minded, well-informed and civil discourse — is, in reality, nothing more than self-absorbed and inextinguishable fury over being mistreated (i.e., criticized or opposed)."

Cheers May 18, 2009 at 12:56 pm

Agreed… I find the shift in perceptions regarding antitrust from the public's point of view extremely disturbing. It seems to be moving from the idea of prosecuting what are considered abuses of the market (though the validity of that itself is in question) to the idea of taking the top business down a few notches and redistributing accordingly.

Just look at the Intel antitrust suit in Europe. The alleged crime was giving volume-based and vendor-based discounts that hurt AMD. Discounts. Wow. I can see how that hurt the EU customers by over a billion euros.

Cheers May 18, 2009 at 1:00 pm

Thanks indiana jim,

Do you realize we're at a blog that was written by university professors that now we know couldn't have been written by university professors? Hope you don't mind repairing the hole in the space-time continuum.

dg lesvic May 18, 2009 at 1:04 pm

Indiana Jim,

Wow! That's hitting the nail on the head.

But I think that, while Boudreaux hit the target, he missed the bullseye.

Monopolies are like anything else, to the consumers' advantage if they arise from the market and to their disadvantage only if they don't.

dg lesvic May 18, 2009 at 1:07 pm

By the way, Boudreaux may take some comfort from not being alone on that, that even Mises missed the bullseye on that one.

dg lesvic May 18, 2009 at 1:08 pm

Cheers,

Your comment was intriguing, but I really don't understand it. Hope you'll elaborate.

Pingry May 18, 2009 at 1:42 pm

So much for positive economics!

A monopolist is a single firm producing for a given output market, period.

Notice how there is no distinction of how this arrangement has arisen (i.e., natural monopoly, government privilege, etc.)

And certainly no mention of normative ideas about whether said monopolist is "good" or "bad" for society.

I mean, Pearlstein is a clown – A poseur pretending to be sophisticated and worldly about issues far more complicated than his little mind can handle.

Here's an idea for antitrust: How about allowing for more competition.

Hmmm….time to rethink Walmart's entrance into banking.

–Pingry

Sam Grove May 18, 2009 at 2:21 pm

We might note that anti-trust arose from incumbent industries that sought government relief from the competitive pressure that J.D. Rockefeller brought to the petroleum industry.

Monopolies are like anything else, to the consumers' advantage if they arise from the market and to their disadvantage only if they don't.

We have some friends who moved up into the Santa Cruz mountains. The nearest grocery sits on Summit Rd. a few miles from their property. Some might think of this store as a monopoly because the next nearest grocery requires driving a significantly longer distance.

Then there is the monopoly you or I have on our own talents.

But a more pointed use of the term "monopoly" is a grant from the king to exclusive control of some market. This type of monopoly never arises from the market.

Was it Alcola Aluminum that had a virtual monopoly at one time? However, as it was not a politically granted monopoly, Alcola did not behave according to popular monopoly theory. Instead of using its market position to raise prices, Alcola actually reduced prices and kept them down.
However, using anti-trust, would-be competitors sued against Alcola in court and won, with the court asserting that just because Alcola did not behave according to monopoly theory was no reason to allow it to keep its position, and thus Alcola was broken up into several companies.

At least, that's how I remember something I once read about it.

CRC May 18, 2009 at 3:13 pm

Cheers: "Just look at the Intel antitrust suit in Europe. The alleged crime was giving volume-based and vendor-based discounts that hurt AMD. Discounts. Wow."

That really isn't all that new. I mean you only need to look back to the Standard Oil case or, even further, the whole Interstate Commerce Commission. This idea of "harmful discounts" was a key piece of reasoning in both of those cases.

And as well know discounts and lower prices are bad things. Unless they are good things.

S.M. Oliva May 18, 2009 at 3:22 pm

Steven Pearlstein is more then an advocate of antitrust. He's actively participated in the Federal Trade Commission's anti-merger hysteria. Last year the FTC opposed the merger of Inova Health System and Prince William Hospital. Pearlstein wrote multiple columns in support of the FTC. He even acknowledged reviewing confidential FTC evidence that neither the hospitals nor the public were allowed to see. (The fact that FTC Chairman Jon Leibowitz is married to a Washington Post editorial board member is, no doubt, a coincidence.)

What's notable here is that the FTC bypassed the normal administrative law judges and assigned the case to one of its own commissioners, Thomas Rosch, who would serve as judge. Documents I later obtained from the FTC showed that Rosch also directly supervised the two-year investigation leading up to the decision to oppose the merger. He was thus prosecutor, judge, and jury. As for bypassing the ALJ, there had been a number of recent cases where the ALJs had ruled against the FTC's staff. Rosch himself said it was important to only allow "antitrust experts" to hear FTC cases — and he didn't consider the ALJs experts.

Pearlstein never mentioned any of this in his "reporting" on the case. In fact, when I confronted him with Rosch's unprecedented — and illegal — decision to appoint himself as the trial judge, Pearlstein dismissed this as "inside baseball." Obviously, the hospitals abandoned their merger rather then face a Rosch-led show trial. Pearlstein commented on the Post's website that this was a "good outcome."

dg lesvic May 18, 2009 at 3:23 pm

Indiana Jim, or was it Injun Joe, or Hoosier Hank?

I had regretted losing track of the great postings here, and have now created my own little archive of them.

Yours here was my very first entry.

So you are forevermore the first among my all-time favorites here.

dg lesvic May 18, 2009 at 3:30 pm

And Videos.

"BTW, I too am outraged, outraged that school teachers, second rate lawyers, pest control operators, failed ranchers, bored housewives, can run for Congress and win a seat, then turn instantly into fountains of wisdom and virtue to which none of us common folk can ever hope to aspire; and who become outraged that we thwart them in their nobility!"

That one goes in, too.

By the way, what does BTW mean?

SaulOhio May 18, 2009 at 3:32 pm

"It's disappointing that Mr. Pearlstein's understanding of both Chicago-school economics and of antitrust is so superficial."

Disappointing, but not surprising. People who are ideologically opposed to free markets can never get the ideas right, always misrepresenting the ideas of free market thinkers. Its the only way they are able to argue against them.

Sam Grove: You probably read in it Ayn Rand's "Capitalism: The Unknown Ideal". Here is the quote from the justice's opinion:

"It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every new-comer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel."

So ALCOA was punished for being too good of a competitor. Its like punishing Michael Jordan for being so agile and fast, and making him wear an ankle weight to slow him down.

dg lesvic May 18, 2009 at 3:52 pm

And VikingVista, Sam, Michael, Lee, thanx for yours, and sure wish I had kept them.

Hope you'll repost them.

And Daniel, thanx for the laughs. They're just as precious. And you really didn't mean any of that, did you. Surely, you jested.

vidyohs May 18, 2009 at 5:16 pm

BTW = By the way.

"Last week, the European Union concluded that the discounts and other practices were anticompetitive and slapped Intel with a record $1.7 billion fine. But while European law focuses much more on maintaining competition, American antitrust law focuses on prices and whether a practice or a merger will cause direct harm to consumers." Pearlstein.

You read a paragraph like that and ask yourself "How is it possible that someone who can influence so many people can be so dumb? Or, maliciously stupid?

In the name of competitiveness, we will fine and punish good competitors, and ensure that lousy competitors remain in business to produce inferior goods and services to waste customer's money.

And, there actually people stupid enough, some comment here, that believe we should emulate the Europeans? GMAFB!

Political Observer May 18, 2009 at 6:41 pm

Don:

Your arguement does not support your conclusion that Mr. Pearlsteins' understanding of Chicago School economics is superficial. Your arguement supports the conclusion that Mr. Pearlsteins' understanding of the Chicago School of Economics is simply wrong. Big difference!

dg lesvic May 18, 2009 at 7:43 pm

Poor Don. He keeps taking a beating for simply saying what needs to be said.

Martin Brock May 18, 2009 at 9:40 pm

… why not do that for any property?

I can imagine some practical difficulties with the idea, but I don't have a fundamental problem with it.

Basically, you're discussing a variation on property taxation. Property taxation has two effects. First, it deprives a title holder of authority over some of the marginal value of the property. Second, it transfers this authority to a more central authority. Reforms I favor do the first but not the second.

I do favor title expiration more generally. For example, I favor it in opposition to estate taxation. One form of title expiration that I discuss is a reform of the progressive estate tax in the U.S.

Basically, when you die, a probate court auctions your assets, but it doesn't transfer monetary proceeds of the sale to a central authority. Instead, it removes the currency from circulation. A community might hold a public bonfire where the paper currency is burned.

This ritual serves several purposes. It celebrates the wealth accumulated by the deceased, it subjects capital allocation to the market rather than the will of the deceased title holder, and it reminds people that money is only an accounting device with no intrinsic value.

Of course, monetary authorities would create more currency and lend it to replace the currency removed from circulation. Bidders at the auction would borrow it.

Why not say "company X owns this building until they earn back ten times what it cost to build it"? That would be ridiculous!

Why?

But by the same token, why shouldn't Russ expect to keep earning revenue from his book?

Why should he?

Earnings from a copyrighted book have two components. One is the marginal value of the author's contribution, and the other is the marginal value of forcibly excluding unauthorized copies.

It's not obvious how one quantifies the former vs. the latter. Why should the latter be limitless? It's not the value of the author's labor, so it's not "property" at all in the Lockean sense. It's the value of forcible imposition. It's a rent.

Furthermore, I doubt that limiting copyrights to ten years would cost Russ much money. How many books do you buy that were written ten or twenty years ago? How many books published decades ago are still in print? Some but not many.

I'm no authority on publishing, but I suppose most authors make most of the money they'll ever make on a book in the first decade. Further value is largely a matter of a reputation established by the book. This reputation creates a larger, more immediate market for subsequent books.

Even with a longer copyright, Russ might relinquish the right after ten years to pursue more profit on later books. Essentially, rent foregone on the earlier book is an advertising expense, since more people presumably read the earlier book if it can be copied freely, and reading the earlier book increases the market for his later books.

Cheers May 19, 2009 at 12:59 am

dg lesvic,

The basic premise that I gleaned from the suit against Intel is essentially two-fold: They offered discounts based on volume, and they offered different discounts to different vendors.

Regarding the first point, in hardware and software sales (and really, any form of B2B sales), this is how business is done. Based on the volume you are able to move, you deal with different levels of sales support. What it does is it induces your downstream sellers to move the next tier of inventory even though they haven't sold the volume yet.

The second thing occurs naturally. As different vendors have different negotiating power based on the market, different prices are attained from their sales reps.

There are two sayings in B2B sales: "The price is never the price" and "the deal is never off". Consumer sales are very solid: you go to the store and buy an apple. The b2b world is totally different. You go to the store and buy a 2 million apples, with 5% down, an additional 25% when they can demonstrate they have fertilized the apples on the trees, and if they aren't delivered on June 25th, the supplier pays you 2.5 million dollars each day they are late. (seriously). The antitrust people don't get this. Because they have never spent 10 hour days on the phone, because each day the product is late costs the company 5 million dollars and it's on their head.

Anyways, back to the point. These actions are normal course of business in every company all around the world. They only become abusive or against the law when monopolist or near-monopolist does it. (Can't remember EU or US numbers, but in Canada, it's investigated at >40% market share, and might be investigated anywhere over 25%). It's written that way because someone, somewhere got the idea in their head that they can determine what is for or against the common good, and that there are different results when a large company does something versus a small one.

It's ridiculous and offensive to anyone who can think.

Anyways, in case you were referring to the second post, it was in response to earlier comments that Pearlstein has made where he basically said that any criticism to his ideas were made by "bloggers". As though a blog was a lifestyle choice representative of intellect as opposed to a basic method of communication that anyone (professor, student or layperson) could use.

dg lesvic May 19, 2009 at 2:29 am

Cheers,

You said, in case I was referring to a second post —-

I don't know what you were referring to.

If you're looking for a response from me, I'm sorry, but I'm lost.

Russell Nelson May 19, 2009 at 9:01 am

I just sent Steve this email:

So, you think that free markets support monopolies, eh? Okay, let's play a simple game. You name a free market monopoly. Then I'll name a monopoly which only exists because government's interference in the market supports the existence of that monopoly. Then it's your turn again. Last man standing wins. Because these things are arguable, let's be generous with each other.

If you lose, you have to change your mind (because if evidence won't change your mind, what will?) and you have to blog about it on washpost.com.

You first.

Econ 101 May 19, 2009 at 10:57 am

The idea of "substitution" pretty much kills any thought that monopolies last very long, except those owned by the govt. Basically, anything and I mean anything has some form of substition choice for consumers. Think margerine for butter, trains for cars, natural gas for propane. The list is endless, and there is bascially nothing that can not be substituted. This is the driver of inovation since monopolies, or even ologopolies are seen as fat.

dg lesvic May 19, 2009 at 11:32 am

Still, what would be wrong with a free market monopoly?

Ernest May 21, 2009 at 2:49 am

This blog entry, about which we are commenting or inspired to comment (I know how tangents arise), is very straightforward, so it's ironic to see the volume of text above this comment. I read some of the comments above. I found most of them boring and had, for me, little value added. Some of you should stop posting your comments.

Phillip May 21, 2009 at 2:56 am

I agree with Ernest. This isn't a sci-fi club where we fawn over details found in a novel, film, or television program. Those who post comments should realize as they post comments and as a result of posting comments, someone might actually read their comments. In other words, appreciate the time someone might spend reading your comments. You can appreciate that time well by failing to post comments. That will work. Or, if you do post a comment, imagine writing something valuable and writing it clearly, as well. But, always consider, perhaps as a default position (a learned instinct), not to write a comment.

James May 21, 2009 at 3:04 am

Ego is for the left. Never "hold court" in a professorial manner, Share your ideas, explore new ones (new to you, perhaps, but new nonetheless) alone and together. Refine and clarify your thinking. Speak in measured tones. It's not all about you. If you find that your endgame, you should look left.

Previous post:

Next post: