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THE INVENTION of ANTITRUST
HERBERT HOVENKAMP, James G. Dinan University Professor
In “ The Invention of Antitrust,” published in the Southern California Law Review, antitrust expert Hovenkamp offers a thorough analysis of the shifting economic, political, and judicial tides from the late nineteenth century to the middle of the twentieth century that formed the foundation of antitrust law as we know it today. He makes the case that Progressive Era reformers pushed approaches to market intervention to the left, even as boundaries and structures were still being defined, leading to an extended neoliberal correction that emerged in the reaction to the New Deal.
In the first three decades of the twentieth century, policymakers “invented antitrust law,” Hovenkamp writes. “In fact, after decades of experimentation we are reclaiming much of it.”
The Sherman Antitrust Act of 1890 and the Clayton Antitrust Act of 1914 were accompanied by a Progressive antitrust movement that was “both political and economic,” reflecting growing concerns about industrialization, the labor movement, consumer power, and the evolution of distribution in an era of technological advancement. In this turbulent economic environment, marginalist economics and industrial organization theory offered competition analysts new tools to assess the marketplace.
Hovenkamp refutes the notion that the Progressives were focused only on size in their antitrust efforts and ignored the opportunities it created. United States Supreme Court Justice Louis Brandeis, for example, was an advocate for scientific management and its beneficial effect on pricing. The response to the growth of trusts was, instead, based in concern that exclusionary practices would be a vehicle for achieving and sustaining higher prices and cementing market dominance.
The Chicago Conference on Trusts
The emerging trust problem was addressed at the Chicago Conference on Trusts in 1899, “an exceptional window into the contemporary mindset,” Hovenkamp writes. Its attendees, which included politicians, economists, lawyers, social scientists, business and labor leaders, insurers, and even clergy, represented every interest group with a stake in policy regarding trusts. Opinions about the treatment of trusts naturally varied widely, but “the strongest consensus around a single view was that the trusts should be controlled by changes in corporate law.”
Following the conference, Hovenkamp writes, “Progressives began to focus more narrowly on the antitrust laws and the discipline of economics as the preferred tool for dealing with the trusts.” Political and moral rhetoric has always been present in the conversation around antitrust, as the conference laid clear, but it failed to serve as a policymaking guide.
Marginalist Economics and Market Revisionism
As Hovenkamp emphasizes, “one cannot understand the set of tools that the Progressive antitrust policy makers deployed without understanding their underlying economics.” And by the 1930s, nearly all economists were marginalists, an “undervalued” movement in the history of antitrust. Marginalism offered a forward-looking perspective on value, placing it in the willingness to pay for the next, or “marginal,” unit of something. This served as a break from the classical view of value as being present in a good or the labor used to make it.
Marginalist analysis presented new ways to quantify supply and demand, expanded the use of mathematics in economics, and undermined the classical view of markets as inherently competitive.
“As a result, marginalism began to make a broad and unprecedented case for selective state intervention in the economy,” Hovenkamp writes.
The shift toward understanding markets as a “created human institution,” rather than simply a product of nature, “was perhaps Progressive economics’ most important contribution.” The markets were increasingly viewed as a reflection of state policy and judged accordingly, and concerns about market coercion grew. Progressive law school professor Robert Hale gave voice to trepidation about the way markets could limit freedom, writing that prevailing economic systems were “permeated with coercive restrictions of individual freedom, and with restrictions, moreover, out of conformity with any formula of ‘equal opportunity.’” This view filtered into public law as well as into competition law, where it influenced a more aggressive approach to vertical mergers.
The development of partial equilibrium analysis, which Cambridge University professor Alfred Marshall borrowed from the science of fluid mechanics, allowed analysts to group firms producing similar products into discrete markets, making the analysis of market behavior “both tractable and useful.”
The focus on individual industries took over the field of business economics and shaped approaches to antitrust policy. Increasingly, regulation was seen as a “corrective for market failure” — those instances when ordinary market forces are insufficient in keeping an industry operating “tolerably well.” Over time, encouraged by the Great Depression, regulation expanded beyond this narrow framework to question whether markets can be trusted to remain efficient and egalitarian at all.
Among the reasons for doubt, Progressives identified pricing discrimination as one of the evils brought about by the trusts, and “most of the economic foundations for our understanding of price discrimination developed during the Progressive Era as an outgrowth of marginal analysis,” Hovenkamp writes.
Potential competition, which had been a “crucial” element in early antitrust analysis as a deterrent to monopoly pricing, “was natural and ordinarily to be expected,” the common Progressive position went. But under closer inspection, policymakers began to worry that “dominant firms could devise practices that would prevent or limit its operation.”
Working with all of these factors in mind, economists John Bates Clark and his son John Maurice Clark formed arguments that helped develop the basic model for antitrust that still holds today, requiring
a showing of “both monopoly power and anticompetitive practices,” Hovenkamp writes. Over time, issues of potential competition evolved into the modern doctrine of “barriers to entry” — “natural or fabricated obstacles” that stood in the way of competition, a term the Supreme Court first used in U.S. v. American Tobacco Co
Over time, as doubts grew about potential competition and its efficacy, assessing the number and power of a company’s actual competitors became more important. By the 1940s and 1950s, “relevant market” analysis was central to questions of market power in a rising tide of judicial decisions.
Another great shift was taking place through the first half of the twentieth century, as conduct-focused antitrust analysis — or wrongful acts, as the 1911 Standard Oil Co. v. U.S. decision placed at the center of its Sherman Act review — ceded ground to concerns of market structure and its effect on the monopoly problem. While Progressive Era cases “often read like tort cases,” Hovenkamp writes, the structuralist revolution “completely flipped that script,” making evidence of bad conduct “almost but not quite irrelevant” in assessing a case.
The Emergence of Vertical Competition Policy
Hovenkamp’s research further tracks the final element of the Progressive contribution to antitrust law: They were the first to examine vertical practices and integration as threats to competition, leaving behind a contribution to the law of vertical integration and restraints that was “formative but also modest.” The Progressives focused on the relationship between vertical integration and “realistic threats to monopoly,” steering antitrust law to the left and condemning practices where, Hovenkamp writes, “harm to competition was never seriously threatened.” By the early 1930s, “the law of vertical practices had developed to a place not all that different from where it is today, save for the treatment of resale price maintenance.”
In assessing the Progressives’ full contribution to antitrust law, Hovenkamp writes that their skepticism about the “benign qualities of markets” led to a more aggressive enforcement environment. As theories of imperfect and monopolistic competition developed, “antitrust policy began to veer left, often past all reasonable boundaries, condemning efficient practices where the creation of monopoly was virtually impossible.”
Today, imperfect competition models have a clear place in the economic literature with well-established empirical power. Despite decades of change in antitrust law, Hovenkamp concludes, “the Progressive response — aggressive in its own time but quite moderate today — has proven to be surprisingly durable.”
