Quotation of the Day…

by Don Boudreaux on July 7, 2011

in Antitrust, Business as usual, Competition, History

… is from page 99 of the late Yale Brozen‘s 1982 book Concentration, Mergers, and Public Policy:

[S]uppressing competition can cause [industrial] concentration to decline.  In 1953, Judge Wyzanski ruled that United Shoe Machinery had monopolized the shoe machinery industry, although all its practices were “honestly industrial.”  He ordered, as a remedy, that United stop competing.  These, of course, were not the literal words of the order.  He ordered the cessation of “practices which without being predatory, abusive or coercive were in economic effect exclusionary.”  Since all successful competitive acts and practices are “exclusionary” in the sense that they divert business toward the firm and away from its rivals, he, in effect, ordered United to stop competing.  The only basis for finding United guilty of monopolizing was its 85 percent share of the market for major machines.  Since the decree, affirmed in 1954 by the Supreme Court, provided for a 1965 review by the Court, the only way for United to avoid further penalties on review was to stop being so competitive and allow its market share to diwindle.

As ordered by the Court, United stopped the provision of free repair service for its machines.

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{ 42 comments }

RLH July 7, 2011 at 10:37 am

Really? I’m dumbfounded. (Someone should point this out to Apple’s competitors in the smartphone and tablet computer markets. Apple provides excellent, free walk-in support in the Apple Stores via the Genius Bar, a practice that the Supreme Court clearly disapproves of.)

yet another Dave July 7, 2011 at 2:42 pm
Methinks1776 July 7, 2011 at 11:00 am

Nothing surprises me anymore – except when the courts and regulators do something in support of free markets.

Unfortunately, United Shoe Machinery didn’t learn the most important lesson in business. If you were a logical thinker, you would assume that the most important lesson is that you have to be the best at serving your customer’s needs. That’s just silly. The most important thing you can do in business is buy political power.

USM could have accounted for 100% of the market and burned down competitors’ factories while providing broken down machinery and no service to its customers to maintain market share. As long as it had political cover, it could’ve done whatever it wanted. Government Sachs learned that lesson very well. The upside is that buying politicians is easier and cheaper than serving the needs of your customers.

How can you stay in business with such a poor business model, you ask? Your purchased protectors in congress will hold a gun to the heads of taxpayers and demand they transfer their wealth to you. After all, part of your “who gives a crap about cost” structure includes employing lots of people to be as inefficient as possible, so we can’t lose all that employment in the economy what with the-unemployed-not-able-to-spend-which-is-a-tragedy-etc. etc. etc.

The financial markets will love it! There’s no easier way to boost cash flow than a wealth transfer from taxpayers to shareholders! Expectations of future transfers will rise. The S&P stocks will party and Muirdiot will hop on this blog to ask “o yeeagh? Undder WICH addminustrashun did the stuk markette rize the mostest?” as proof that Democrap thieves are better than Rethuglican thieves.

I hope we have all learned our lesson that hard work, honesty, productivity and wealth creation just passe. Rent Seeking is the only way to ensure wealth.

Economiser July 7, 2011 at 1:47 pm

I don’t think large businesses start out thinking that way. They start out growing by being good at what they do. Once they reach a certain size, though, they realize that the rate of return from rent seeking exceeds the rate of return from trying to expand an already-large business. It’s harder to get market-beating growth rates on a large amount of assets, and when they’re really big they can get their calls answered by senior government officials, so rent seeking becomes more profitable. Naturally they shift their focus to the easier way to make money.

Rent-seeking businesses are not admirable, but the real blame lies on the government for granting them favors. The business is just doing what it’s set up to do — make money.

vikingvista July 7, 2011 at 2:21 pm

There is no more efficient and rewarding tool for all manner of larceny and violence than government. It is the strongest available magnet for those wishing harm upon their neighbors.

And yet a great many people oddly believe government to be the best solution to those problems.

John Dewey July 7, 2011 at 2:23 pm

Economiser: “but the real blame lies on the government for granting them favors. The business is just doing what it’s set up to do — make money.”

Yes!! I am so pleased to read that someone else shares this view.

One more point I’ve made before – a point on which some will disagree – is that voters must share the blame for allowing politicians to get away with such behavior. Many times I have heard intelligent people, upon seeing the latest tale of government corruption, dismiss the seriousness of the action with a simple “They’re all corrupt. We can’t do anything about it.”.

Methinks1776 July 7, 2011 at 2:48 pm

John,

It’s rare for me to have a substantive disagreement with you, but here I do disagree.

In a recent conversation with me on this blog you blamed the public for not outbidding big business in buying political power. Forget whether or not this is a good idea (I don’t think it is), but it’s impossible to do even if it is.

John Dewey July 7, 2011 at 2:56 pm

My experience with politicians leads me to believe they will do whatever is required to maintain power. So, if enough voters threaten them on a particular issue, they will sometimes reject – at least temporarily – the position of a corporate contributor. Of course, I do understand that “enough voters” is a very large number. And the issue has to be one which is fairly black-and-white, in order to prevent the politician from moving to the gray compromise.

John Dewey July 7, 2011 at 2:58 pm

FYI,

As long as we continue to respect each other, I have no problem with substantive disagreement. I’ve shared a bed for 34 years with someone who frequently has substantive disagreements with me. She hasn’t shot me yet (I keep the guns hidden).

Dan J July 7, 2011 at 3:02 pm

The Tea Party was the closest thing to general public uniting and forcing politicians into re-evaluating their stances. And, that fervor and cohesion is difficult to maintain. Big govt sponsors and media rose up to denigrate and diminish. Even now, the fact that Mitt Romney leads the polling shows the diminishing effects of public unification to alter the politicians or rest of the public into the more ‘fair’ atmosphere of limited govt.

John Dewey July 7, 2011 at 3:09 pm

Dan J: “that fervor and cohesion is difficult to maintain.”

You may be right. The Tea Party did have some big successes in 2010. And it seems that many in Congress are still fearful enough of them that tax increases are very difficult to enact. We’ll see.

For what its worth, I believe Rick Perry would crush Romney. Zogby poll last week said it’s about 55% to 22% among likely Republican voters. I just hope my texas governor didn’t wait too long.

Methinks1776 July 7, 2011 at 3:36 pm

Right, John. But how many voters do you know who are not themselves rent seeking? How many are calling for government to stop promising goodies stolen from others? Not enough.

Politics is a futures market in stolen goods.

Methinks1776 July 7, 2011 at 3:37 pm

BTW….I’m sure it has occurred to you that if she’s that close to you while you’re in dreamland, she doesn’t actually need a gun to kill you :)

yet another Dave July 7, 2011 at 5:22 pm

Politics is a futures market in stolen goods.

I am totally stealing that one – awesome!

Methinks1776 July 7, 2011 at 6:29 pm

YaDave,

It is awesome. I did not come up with it, though. I can’t remember where I heard it, but I didn’t think of it.

Ron H. July 8, 2011 at 2:03 am

“Elections are Futures Markets in Stolen Property” – H.L. Mencken

Methinks1776 July 8, 2011 at 8:25 am

Mencken! Who else?
Thank you, Ron H.

Dan J July 7, 2011 at 2:50 pm

I agree with the ‘govt is the problem’ statement. As long as govt possesses the powers that govt has assumed over the past 100yrs, they continue to attract the flow of money and rent-seeking.
Which is why, I assume that a flat tax on businesses with no deductions will cut out one leg from govt power. The tax code is where a vast majority of federal govt powers lie.

tdp July 7, 2011 at 5:52 pm

Fair Tax.

Economiser July 7, 2011 at 7:14 pm

A flat tax, coupled with a strong prohibition on government borrowing in the ordinary course. There is no reason federal or state governments should be borrowing to pay routine expenses, yet it’s taken as a given that they do. Any government borrowing should be for extraordinary reasons (e.g., a war), and should be paid back in short order.

yet another Dave July 8, 2011 at 11:19 am

Advance apology for OT post

@ tdp

I really wanted to like the so-called Fair Tax better than the status quo when I first heard about it, but when I learned more about it I realized it is a HOPRRIBLE proposal because of its fundamental flaws. The FT is a big-government statist’s wet dream come true.

I’m reasonably sure a sales tax would be less invasive overall than income based taxation, but the FT rate is WAY too high. It is also very sleazy to use an inclusive rate. The rate should be expressed as a percentage of the transaction (just as all extant sales taxes are calculated), but that would mean FT proponents would advertise the true 37% rate. That would never gain the support needed, so in comes the deception. Also, it is inevitable that many exceptions will be legislated into it, which will put pressure for an even higher rate.

Its supporters do some magical thinking when they claim it will both lower the tax burden on people and be revenue neutral. And it has no teeth behind the claim that it will eliminate income taxes. It won’t. The FT legislation encourages congress to pass an amendment to repeal the 16th but (unless it has changed) its implementation doesn’t wait for the repeal to happen. So, we’d most likely end up with both. It is also woefully inadequate in limiting the ability of politicians to manipulate the tax rate, even without having to debate or pass legislation.

Worst of all is the idiotic pre-bate concept. Great, everybody gets a check from the government on a regular basis, so they all think the gov’t is just great. If you are a statist wanting to grow the government beyond it present colossal excess, the so-called Fair Tax is just what the doctor ordered.

In short, the present form of so-called Fair Tax should be opposed by everybody. If they stop the deceptive advertising, lower the rate, require repeal and full elimination of income taxes before implementation, impose super-super-majority requirements to raise the rate, have the rate fixed rather than driven by some formula, and eliminate the pre-bate, then it might be worthy of consideration.

My little OT rant here barely scratches the surface of the problems with the FT proposal – I encourage everybody to educate themselves on the subject so we can hopefully prevent this disaster from passing.

Methinks1776 July 7, 2011 at 2:44 pm

I don’t think large businesses start out thinking that way.

Fools!

Once they reach a certain size, though, they realize that the rate of return from rent seeking exceeds the rate of return from trying to expand an already-large business.

That size is getting smaller and smaller. Dodd-Frank compels your hedge fund clients as small as $150MM to submit to regulation we’ve previously only seen in regulated broker dealers. Since the regs aren’t written yet, it’s possible they will compel even $50MM hedge funds to submit to the hell BD’s face. That is very very very expensive. Speaking of which, check out what the SEC just did to CBOE firms – most of which have no resources to cope with this.

Talk to my contractor, his father (a boat builder), and virtually any tiny business trying to engage in normal commerce. Same story.

Buy politicians or die – no matter your size. You just don’t even get the chance to grow. You have to be too big to fail or you will be too small to succeed – because the government will drown you. I agree it’s not the fault of business. It is virtually impossible to conduct business normally right now and it’s been getting harder in direct proportion with the explosive growth of the state. I thought that came through my sarcasm. Maybe it didn’t.

Economiser July 7, 2011 at 7:18 pm

Agreed. I know we both see this every day.

Dodd-Frank makes life very, very difficult for mid-sized financial firms. Either you have to be too small to be regulated (and not be in a heavily regulated business, like broker-dealers), or you have to be too big to fail. The costs of operation are simply too much for those in the middle. As the rules kick in, it’ll be devastating for many, many firms.

Methinks1776 July 7, 2011 at 7:26 pm

And, as you know, the vast majority of the rules are yet to be written. A friend of mine is a hedge fund lawyer and he’s been giving me the low-down. Holy hell! the statutes (is that the right word?) are so broad that the SEC has the power to do whatever. it. wants. to. any. firm. of. any. size. and I think it has implications for firms other than financial firms, does it not?

In BD land, even if you are a dealer only and trading your own personal money, you are subject to the same exact regulations as a giant broker with with customers. Thousands of BDW’s have been filed since 2008 and another wave is coming. Soon, it’ll be just the too big to fails. I don’t think that’s accidental. Good-bye competition, hello high prices, high transactions costs, stagnation, bad service and market volatility.

Dan J July 7, 2011 at 2:57 pm

I agree that the rent-seeking is a ‘learned’ behavior. Can’t beat them (competitively with quality) so you beat them out by govt favoritism.
Ford, Honda, Hyundai, Toyota had beaten GM and Chrysler after decades of rivalry competitiveness………… But, govt could not have their darling rent-seekers sent to the minors or into forced retirement. GM would have been sent to the minors and forced to rebuild in a less costly manner. Chrysler would have said goodnite and the rest of the industry would have picked up the pieces and kept a portion of their employees…… employed. Aaaaannndd, billions would have been saved……… billions.

tdp July 7, 2011 at 5:51 pm

The more I read about Dodd-Frank the more I want to throw everyone involved in writing it into a pot of boiling liquefied excrement. The government creates the mortgage crisis and recession, then blames small and medium sized companies for it and chokes them out of existence with regulations, doing immense damage to the economy, and then spends almost a TRILLION dollars bailing out the rent seekers who blew legislators under their desks for special favors. To recoup the money the pissed away screwing up the economy, they decide to take taxpayers’ money and try and raise taxes. Then, after trying to piss away money that could have been spent far more productively in the private sector, they claim that not taking more money from “the rich” (of course excluding the privileged government elite and corporate rent-seekers with their cushy benefits and numerous funds into which they can avert income to avoid taxation) is “giving a trillion dollars of tax breaks to every millionaire and billionaire in the country”.

Methinks1776 July 7, 2011 at 6:36 pm

…the more I want to throw everyone involved in writing it into a pot of boiling liquefied excrement.

It was hard for me to pick a favourite line out of your post, but I’m going with this one. That comment hits the nail squarely on the head. And I love the imagery. You are a genius.

Mesa Econoguy July 7, 2011 at 6:48 pm

I second the praise, and would add that Doddering Frank codifies and enshrines too big to fail firms, thereby ensuring their ongoing existence and larger future failures and bailouts.

You’ve accurately reflected my current macro-rage.

I need a drink.

vidyohs July 7, 2011 at 6:53 pm

Remember though, according to the best socialist minds in the country as long as one person has money, we all have money, and we aren’t broke until we have spent his money.

Economiser July 7, 2011 at 7:21 pm

Fourthed. Well put, good sir.

vikingvista July 8, 2011 at 12:38 am

And the solution to arson is to give the arsonist a blowtorch.

yet another Dave July 8, 2011 at 11:22 am

I’ll fifth the high praise! Excellent post.

Subhi Andrews July 7, 2011 at 6:05 pm

This is an excellent point. Many free-market types argue that anti-trust regulations are ineffective. I think that argument is foolish. If a company gets sued on the basis of some “antitrust” violation, then it has real effects on its operations. Microsoft was a victim at the early part of last decade. Apple or Google, or even Facebook could be the next victim.

vikingvista July 8, 2011 at 12:36 am

Ineffective at their ostensible task. The real purpose and effect of government regulations–especially anti-trust regulations–is to protect certain groups from competition.

Methinks1776 July 8, 2011 at 1:15 am

especially nuthin’ :)

I can’t think of any regulation that doesn’t do that.

Subhi Andrews July 8, 2011 at 4:40 am

I agree.

My point is, many point to the successes of MS’s competitors as proof that market takes care of monopolies. Well, I can’t agree with that argument. Everything from MS’s 150 million investment in Apple in the late 1997 to Bill Gates’s Foundation could be a response to anti-trust campaign. They had to lay low for quite a long time, including making no aggressive aquisitions.

vikingvista July 8, 2011 at 9:44 am

Standing in the way of a business’s plans, which government very effectively does all the time, is not the same as promoting competition.

yet another Dave July 8, 2011 at 11:23 am

What better way to get business to pay you than blocking their plans. Government is like the bridge troll – evil and disgusting, but you gotta pay to get across.

vikingvista July 8, 2011 at 7:49 pm

If the troll makes you agree to something as a condition of crossing, do you feel obliged to respect that agreement?

Chucklehead July 8, 2011 at 2:37 am

In the name of the general welfare, to protect the people’s security and total stability, it is decreed for the duration of the national emergency that:

#1. All workers, wage earners, and employers of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment, under penalty of a term in jail. The penalty shall be determined by the Unification Board, such Board to be appointed by the Bureau of Economic Planning and National Resources. All persons reaching the age of 21 shall report to the Unification Board, which shall assign them to where, in its opinion, their services will best serve the interests of the nation.

#2. All industrial, commercial, manufacturing and business establishments of any nature whatsoever shall henceforth remain in operation, and the owners of such establishments shall not quit nor leave nor retire, nor close, sell or transfer their business, under penalty of the nationalization of their establishment and of any and all of their property.

#3. All patents and copyrights, pertaining to any devices, inventions, formulas, process and works of any nature whatsoever, shall be turned over to the nation as a patriotic emergency gift by means of Gift Certificates to me signed voluntarily by the owners of all such patents and copyrights. The Unification Board shall then license the use of such patents and copyrights to all applicants, equally and without discrimination, for the purpose of eliminating monopolistic practices, discarding obsolete products and making the best available to the whole nation. No trademarks, brand names or copyrighted titles shall be used. Every formerly patented product shall be known by a new name and sold by all manufactures under the same name, such name to be selected by the Unification Board. All private trademarks and brand names are hereby abolished.

#4. No new devices, inventions, products, or goods of any nature whatsoever, not now on the marker, shall be produced, invented, manufactured or sold after the date of this directive. The Office of Patents and Copyrights is hereby suspended.

#5. Every establishment, concern, corporation or person engaged in production of any nature whatsoever shall henceforth produce the same amount of goods per year as it, they or he produced during the Basic Year, no more and no less. The year to be known as the Basic or Yardstick Year is to be the year ending on the date of this directive. Over or under production shall be fined, such fines to be determined by the Unification Board.

#6. Every person of any age, sex, class, or income, shall henceforth spend the same amount of money on the purchase of goods per year as he or she spent during the Basic Year, no more and no less. Over or under purchasing shall be fined, such fines to be determined by the Unification Board.

#7. All wages, prices, salaries, dividends, profits, interest rates and forms of income of any nature whatsoever, shall be frozen at their present figures, as of the date of this directive.

#8. All cases arising from the rules not specifically provided for in this directive, shall be settled and determined by the Unification Board, whose decisions will be final.

Per Kurowski July 8, 2011 at 7:51 am

Right now, in front of our eyes, without almost no one protesting it, the regulators will be suppressing competition by awarding 25-30 systemic important financial institutions a “too-big-to-fail” franchise, against a mere 1 to 2.5 percent of extra capital on risk-weighted assets, and which if the risk-weights are 0% or 20%, means basically nothing, and all payable with easy installments until 2019. How crazy!

And what will now happen to all other de-facto declared “systemically unimportant and irrelevant financial institutions”? Bye, bye! How sad!

A.J. Lenze July 8, 2011 at 8:05 am

Solution: take your business (and the associated jobs) overseas. No doubt the U.S. will put restrictions on importing these machines, so you may only be able to sell them to foreign shoe producers. So only foreign shoe producers will get the benefits that 85% of American shoe producers can no longer enjoy. Result: shoe producers also take their business (and the associated jobs) overseas.

I wonder how often companies that move their business overseas do so simply to avoid ridiculous regulations like this one.

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