… is from page 43 of University of Connecticut economist Richard Langlois’s monumental forthcoming (2023) study, The Corporation and the Twentieth Century:
Here we begin to glimpse the great irony of American antitrust policy at the turn of the twentieth century: legislation pushed in part by small independent businesses to ward off the threat of the giant corporation actually harmed the small firms, which relied on coordination through contract, and reduced the relative cost of coordination within boundaries of large enterprises.
DBx: Government restrictions on contractual agreements across different firms often artificially increased the attractiveness to those firms of merging with each other.
Real-world economic activity is unfathomably complex – or, rather, it must be so if the results of this activity are to sustain our modern standard of living. The lowest-cost means of accomplishing some tasks is for producer A to sell inputs in arms’-length exchange to producer B. The lowest-cost means of accomplishing some other tasks – tasks W and X – is for producer B to perform both of these tasks in-house. The lowest-cost means of accomplishing yet other tasks – tasks Y and Z – is for producer B to enter into long-term ‘relational’ contracts with producer C, contracts in which B and C commit to interact with each other in particular ways that are hoped will minimize the total cost of performing tasks Y and Z.
Absent the actual trial-and-error of market processes, no one can possibly know what are the best means of arranging for the performance of different economic tasks. These ‘best’ means vary from place to place, from output to output, and from time to time. For an economics professor, a law student, a bureaucrat, a media pundit, or a politician to proclaim that this particular commercial arrangement is wasteful and that that specific commercial arrangement is wonderful is the height of hubris.
Government can certainly raise the costs of using particular methods of contracting and of otherwise arranging in particular ways production and exchange activities. Government can thus change the ‘industrial organization.’ But unless and until government officials gain access to the knowledge available to a being closer to omniscience than are ordinary humans, the results over time of penalizing this particular contractual arrangement and subsidizing that other particular contractual arrangement will be to reduce the economy’s overall productivity – and often to do so in ways that generate results quite the opposite of what even rent-seekers believe will materialize.